17218 1 UNITED STATES OF AMERICA BEFORE THE 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVINGS ASSOCIATION OF ) 5 TEXAS, Houston, Texas, and ) ) 6 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings ) 7 and Loan Holding Company ) ) OTS Order 8 MAXXAM, INC., Houston, Texas, ) No. AP 95-40 a Diversified Savings and ) Date: 9 Loan Holding Company ) Dec. 26, 1995 ) 10 FEDERATED DEVELOPMENT CO., ) a New York Business Trust, ) 11 ) CHARLES E. HURWITZ, ) 12 Institution-Affiliated Party ) and Present and Former Director ) 13 of United Savings Association ) of Texas, United Financial Group,) 14 and/or MAXXAM, Inc.; and ) ) 15 BARRY A. MUNITZ, JENARD M. GROSS,) ARTHUR S. BERNER, RONALD HUEBSCH,) 16 and MICHAEL CROW, Present and ) Former Directors and/or Officers ) 17 of United Savings Association of ) Texas, United Financial Group, ) 18 and/or MAXXAM, Inc., ) ) 19 Respondents. ) 20 21 TRIAL PROCEEDINGS FOR JULY 30, 1998 22 17219 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire Special Enforcement Counsel 4 PAUL LEIMAN, Esquire SCOTT SCHWARTZ, Esquire 5 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire 6 and BRYAN VEIS, Esquire of: Office of Thrift Supervision 7 Department of the Treasury 1700 G Street, N.W. 8 Washington, D.C. 20552 (202) 906-7395 9 ON BEHALF OF RESPONDENT MAXXAM, INC.: 10 FRANK J. EISENHART, Esquire 11 of: Dechert, Price & Rhoads 1500 K Street, N.W. 12 Washington, D.C. 20005-1208 (202) 626-3306 13 DALE A. HEAD (in-house) 14 Managing Counsel MAXXAM, Inc. 15 5847 San Felipe, Suite 2600 Houston, Texas 77057 16 (713) 267-3668 17 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire 19 KATHLEEN KOPP, Esquire of: Mayor, Day, Caldwell & Keeton 20 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 21 (713) 225-7013 22 17220 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire 3 of: Clements, O'Neill, Pierce & Nickens 1000 Louisiana Street, Suite 1800 4 Houston, Texas 77002 (713) 654-7608 5 ON BEHALF OF JENARD M. GROSS: 6 PAUL BLANKENSTEIN, Esquire 7 MARK A. PERRY, Esquire of: Gibson, Dunn & Crutcher 8 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5303 9 (202) 955-8500 10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 11 JOHN K. VILLA, Esquire MARY CLARK, Esquire 12 PAUL DUEFFERT, Esquire of: Williams & Connolly 13 725 Twelfth Street, N.W. Washington, D.C. 20005 14 (202) 434-5000 15 OTS COURT: 16 HONORABLE ARTHUR L. SHIPE Administrative Law Judge 17 Office of Financial Institutions Adjudication 1700 G Street, N.W., 6th Floor 18 Washington, D.C. 20552 Jerry Langdon, Judge Shipe's Clerk 19 REPORTED BY: 20 Ms. Marcy Clark, CSR 21 Ms. Shauna Foreman, CSR 22 17221 1 2 INDEX OF PROCEEDINGS 3 Page 4 VIVIAN CARLTON 5 Continued Examination by Mr. Veis.......17223 6 Examination by Ms. Clark................17331 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 17222 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Veis, you may continue with your 6 examination. 7 MR. VEIS: Thank you, Your Honor. 8 First, I would like to address a preliminary 9 matter with respect to Exhibit A14055A. If 10 Your Honor will recall, there was a question about 11 two of the pages in that exhibit which required 12 front and back copying; and in the copies that had 13 been distributed to counsel and the Court, the 14 copying service had only copied the front. 15 We have -- well, the exhibit that was 16 given to the witness did have the front and back 17 pages; so, it was complete. I have supplied to 18 counsel those pages copied so that there's a copy 19 of both sides. I can either provide the 20 substitute pages to the Court or an entire new 21 exhibit as the Court wishes. 22 THE COURT: You can give me the pages. 17223 1 MR. VEIS: Thank you, Your Honor. 2 3 CONTINUED EXAMINATION 4 5 Q. (BY MR. VEIS) Ms. Carlton, I would 6 like to hand you an exhibit that's been marked 7 A14072. 8 What is A14072? 9 A. This document is an agenda to a special 10 board meeting that was held at the end of the 1987 11 examination when -- in which it was required that 12 the board of directors of the institution and 13 senior management attend this meeting in order 14 that we could present the findings of the 15 examination. 16 Q. When was that meeting held? 17 A. It was held March 30th, 1988. 18 Q. This was a meeting that was held after 19 the meeting with management on March 28th; is that 20 correct? 21 A. That's correct. 22 Q. Is this your work paper or agenda with 17224 1 respect to that meeting? 2 A. Yes, it is. 3 MR. VEIS: Your Honor, I move the 4 admission of A14072. 5 MS. CLARK: No objection. 6 THE COURT: Received. 7 Q. (BY MR. VEIS) Now, Ms. Carlton, I 8 would like to ask you about the board meeting. 9 What is the function of the board 10 meeting? Why is the board meeting held? 11 A. The ultimate responsibility of the 12 financial condition of an institution, including 13 the management and having proper management and 14 oversight of an institution, is first charged at 15 the board of directors level. And we use what we 16 call the "top-down" approach starting with the 17 board. They are ultimately responsible for the 18 policies and procedures. Therefore, upon 19 completion of the exam, we want to make sure that 20 the board members know directly themselves, not 21 heard from management but heard from the 22 regulators the condition that we find the 17225 1 institution. 2 Q. And does the agenda indicate what you 3 told the board about the condition of the 4 institution? 5 A. It will be an outline of that 6 discussion. 7 Q. Now, I notice that whereas in 8 Exhibit A14071, which is the March 28th agenda for 9 the meeting with management, you addressed only 10 the net worth failure as of December 31st, 1987. 11 This appears to address the deficit 12 regulatory capital requirement for both 13 September 30, 1987, and December 31st, 1987; is 14 that correct? 15 A. That's correct. 16 Q. Now, could you please explain, then, 17 what the various attachments to this document are? 18 A. The attachments to the document is 19 support for the numbers used above. And in order 20 that management at that point and the board would 21 have before them the actual numbers, the actual 22 loans that were classified, they would actually 17226 1 have in hand the information that was used to draw 2 the conclusions that will be presented to them at 3 that time. 4 Q. Let me direct your attention, then, to 5 Attachment 1 which is at OW128911. 6 A. Okay. 7 Q. Now, that appears to be a calculation 8 of the net worth deficit as of September 30, 1987. 9 Is that what it is? 10 A. That's correct. 11 Q. Now, if you'll recall yesterday when we 12 were discussing the March 28th agenda, you went 13 through the calculation as of December 31, 1987. 14 Do you recall that? 15 A. Yes. 16 Q. Is the calculation in Attachment 1 of 17 Exhibit A14072 relating to the net worth of the 18 institution on September 30, 1987, calculated in a 19 similar fashion as the calculation we discussed 20 yesterday regarding December 31st? 21 A. Yes, it is. 22 Q. Are there any differences in the 17227 1 methodology at all? 2 A. No. 3 Q. Were the numbers derived in the same 4 fashion from the books and records of the 5 institution or from the regulators' calculations? 6 A. Correct. 7 Q. Now, let me address, then, 8 Attachment 2. 9 Well, before I do that, there's a 10 difference between the institution's statement of 11 its net worth and the examiner's statement of the 12 net worth as of September 30, 1987, correct? 13 A. That's correct. 14 Q. What did the institution say its net 15 worth was? 16 A. Their minimum net worth was 17 183 million. 18 Q. And what did the examiners say the 19 minimum net worth was? 20 A. 218 million. 21 Q. And did the institution at that point 22 reflect on its books a deficit in its required net 17228 1 worth? 2 A. No, they did not. 3 Q. What did the examiners find? 4 A. At that point, we were showing a 5 deficit of 14.4, negative -- a deficit of 14.4. 6 Q. Now, I would like to direct your 7 attention, then, to the next page, which is 8 Attachment 2, which is OW128912; and I would ask 9 you, also, to turn your attention to 10 Exhibit 14071, the September 28th -- I'm sorry -- 11 the March 28th agenda, and Attachment 1 to that 12 document which is OW128928. 13 Can you find the other document? 14 A. What was the -- 15 Q. It should be the last exhibit in the 16 pile. 17 Now, if you look at Attachment 1 to 18 Exhibit A14071, does Attachment 2 to the agenda 19 for the board meeting reiterate the information 20 that was given to management two days prior in the 21 Attachment 1 to that agenda? 22 A. That's correct, it does. 17229 1 Q. So, it's the same calculation, correct? 2 A. Right. 3 Q. Now, I would like you to take a look at 4 Attachment 3, which is OW128913. 5 Now, what is that? 6 A. This is the -- showing the specific 7 reserve analysis. 8 Q. What is the examiner's calculation of 9 the specific reserves? 10 A. The examiners required $62 million. 11 Q. And can you tie that to a figure in the 12 previous attachment, Attachment 2? Where does 13 that go into the calculation? 14 A. In Attachment 2, you would find that in 15 that 74 million. 16 Q. And that 74 million consists of what? 17 I guess, let me ask you this: Is the $62 million 18 reflected in Footnote 2 of Attachment 2? 19 A. Yes, it is. 20 Q. And how does that relate to the 21 calculation? 22 A. The amount that -- your specific 17230 1 reserves would be accounted 100 percent in the 2 actual net worth calculation. 3 Q. So, Attachment 3 supports the 4 62-million-dollar figure in Attachment 2? 5 A. Right. 6 Q. Thank you. 7 What is Attachment 4, which is 8 OW128914? 9 A. Attachment 4 is the specific reserve 10 analysis prepared by the institution, an 11 individual by the name of Chuck Doolittle. 12 Q. That's then -- can you tie that back to 13 Attachment 2, the calculation of the total 14 specific reserves? 15 A. If you go to the middle of the page, 16 you will see the specific reserves number. They 17 have it 32,235. That's addressed in the Footnote 18 No. 2. 19 Q. Let me direct your attention, then, to 20 Attachment 5. What is Attachment 5? 21 A. USAT is -- this is a summary of the 22 reserves for the institution showing what's 17231 1 reported on the quarterly report and what's 2 reported on a GAAP basis for the institution. 3 Q. Let me direct your attention to 4 Attachment 7. 5 What is Attachment 7? That's OW128917. 6 A. Attachment 7 is a summary of criticized 7 assets that shows loans that were classified due 8 to well-defined weaknesses and due to 9 delinquencies and loans that were special mention. 10 Q. And that is as of September 30, 1987? 11 A. That's correct. 12 Q. Directing your attention to 13 Attachment 8, which is OW128918, what is that? 14 A. This is a summary of action that -- 15 where we dictate what is required by the 16 criticized asset, meaning how the -- it would 17 have -- the impact it would have on the net worth 18 and, also, the categories by placing the amounts 19 into specific reserves. We also outline the 20 percent of the specific reserves to net worth. 21 And at the bottom, we documented the increase in 22 regulatory capital requirements and showed that 17232 1 analysis to what an adjusted regulatory capital 2 should be. 3 Q. Then let me direct your attention to 4 Attachment 9, which is at OW128919 and OW128920. 5 A. This is a laundry list of the loans 6 that were classified during the examination that 7 shows loans previously classified in the previous 8 examination bringing them forward to the loans 9 that were classified during the current 10 examination. 11 Q. Now, I would like to direct your 12 attention specifically to the item under "loans 13 classified during the previous examination." 14 Line 4 and 5 which both have the name Norwood, 15 there are two entries there. 16 Do you see one for $21 million plus and 17 one for $9.4 million? 18 A. I see that. 19 Q. And opposite that loan number in the 20 first line, it has a loan number 14-132759. 21 Do you see that? 22 A. Yes. 17233 1 Q. Does that indicate that that was, in 2 fact, a loan number? 3 A. That's correct. 4 Q. And that is opposite the entry 5 $21,521,000? 6 A. That's correct. 7 Q. Now, what's the next line? It 8 indicates -- under "loan number," it has the 9 letters "UFC"? 10 A. That stood for United Financial 11 Corporation. It was the name of the holding 12 company. That amount, 9.4 million, was an 13 investment amount into that holding company. 14 Q. Was United Financial Corporation a 15 holding company for the institution, or was it a 16 subsidiary of the institution? 17 A. It was a subsidiary of United, the 18 institution. 19 Q. So, that's a 9.4-million-dollar 20 investment by the subsidiary in the Norwood 21 project? 22 A. Yes. 17234 1 Q. And you were classifying that -- 2 A. Yes, we were. 3 Q. -- as substandard? 4 A. Right. 5 Q. And this indicates that the institution 6 disagreed; is that correct? 7 A. Right. 8 Q. And they continued to disagree on the 9 classification of the loan, as well, I gather? 10 A. That's correct. 11 Q. Ms. Carlton, I would like to now show 12 you a document that's been marked as A14068. 13 Ms. Carlton, what is A14068? 14 A. This is a document that is used on a 15 supervisory level. Anytime that an institution 16 has been ruled as a problem or requiring 17 additional supervision, a chronology is prepared 18 which outlines actions and events that have taken 19 place. Up front, it gives you the information on 20 the institution as far as asset size. And this 21 information is captured into one document that any 22 time meetings are conducted, you have all that 17235 1 information before you to act on. 2 Q. Now, is this document supplied to you 3 as examiner-in-charge? 4 A. Yes, it is. 5 Q. And is it in the general file of the 6 examination work papers? 7 A. Yes, it is. 8 MR. VEIS: Your Honor, I move the 9 admission of A14068. 10 THE COURT: You have no objection to 11 receipt of the document? 12 MS. CLARK: No objection. 13 THE COURT: Received. 14 Q. (BY MR. VEIS) Ms. Carlton, I would 15 like to direct your attention to Page 2 of 16 Exhibit A14068, which is OW128963, under the 17 heading "one concise description of the problem." 18 A. Okay. 19 Q. Now, the first paragraph -- if you 20 would, please read those two paragraphs to 21 yourself; and then I'll ask you some questions 22 about them. 17236 1 A. (Witness reviews the document.) Okay. 2 Q. Now, I would like to direct your 3 attention particularly to the second paragraph. 4 The second sentence states, "United has fiercely 5 contested the net worth failure on the grounds 6 that (1), they disagreed with many of the assets 7 classified, and (2), loan loss reserves being 8 reported by United and examiners as specific 9 reserves were actually general reserves 10 accountable as regulatory capital." 11 Do you see that sentence? 12 A. Yes. 13 Q. Now, can you briefly describe Item 1? 14 What does that refer to? 15 A. "They disagreed with many of the assets 16 classified" -- 17 Q. Yes. That one. 18 A. It meant that based on the 19 classifications and the write-ups that we had 20 presented, management felt that our 21 classifications were in error. 22 Q. And they still weren't separating those 17237 1 classifications and reflecting them on the books? 2 A. Right. 3 Q. Now, what about No. 2? Can you explain 4 what that refers to? 5 A. This means that the institution was 6 still counting their reserves as general reserves 7 instead of specific reserves in order that they 8 could continue to count those reserves as a part 9 of the capital calculation. 10 Q. The following sentence is referring to 11 your reports to the supervisory personnel of 12 regulatory net worth failure in December and the 13 amount of losses in December, correct? 14 A. That's correct. 15 Q. Now, I would like to direct your 16 attention to the last sentence. "United has 17 forecast insolvency within 12 to 14 months." 18 Do you see that? 19 A. Yes. 20 Q. Is it your understanding that that was 21 the institution's forecast as of the date of this 22 memorandum: May 1988? 17238 1 A. Yes, it was. 2 Q. Now, Item 2 refers to supervisory 3 action to date. 4 What does that list of items -- what is 5 the significance of that list of items? 6 A. This list of items shows the 7 supervisory action that the supervisory agents had 8 commenced taking on the institution due to the 9 items that had been disclosed in examinations, be 10 it interim or the regular examination report, in 11 which, based on the ratings of those institutions, 12 dictated certain supervisory action would take 13 place, some being refusal to approve applications. 14 And you have a list of those things that started 15 to take place. 16 Q. Now, let me direct your attention to 17 the following page, OW128964. There is an entry 18 for October 23rd, 1987. If you would, just please 19 read that. 20 A. (Witness reviews the document.) Okay. 21 Q. That refers to a review of United's 22 books and record by Grant Thornton? 17239 1 A. That's correct. 2 Q. Now, what is that review intended to 3 do? 4 A. That review was intended to clarify or 5 reiterate that the findings in the 1986 exam were, 6 indeed, correct in noting that the books and 7 records of United were not in a condition that you 8 could readily review them and make a decision on 9 them. 10 Q. And that indicates the review was 11 completed on October 16th, 1987? 12 A. That's correct. 13 Q. What date did you start your 1987 14 examination? 15 A. In November. 16 Q. Okay. Now, it indicates there was a 17 meeting held with management; and, among others, 18 the EIC was present. 19 Do you see that? 20 A. Right. 21 Q. Does that refer to you? 22 A. Yes. 17240 1 Q. You were at that meeting? 2 A. Yes. 3 Q. Now, it says, "Phase 2 of the review, 4 determining accuracy of information found in the 5 general ledger, will begin in 1988 only if the 6 forthcoming plans of the association are 7 warranted." 8 Do you know what that refers to? 9 A. If we had not found improvements in the 10 books and records, Grant Thornton would have been 11 allowed or directed to continue an additional 12 review, that it would go to a deeper level of 13 verification of the books and records. 14 Q. Let me direct your attention to 15 December 31st, 1987. 16 A. Okay. 17 Q. Do you see a reference there to review 18 by Prudential-Bache? And let me direct your 19 attention particularly to the third paragraph. 20 A. Yes. 21 Q. It says here, "The third-party review 22 of United's junk bond portfolio was completed. 17241 1 Prudential-Bache officially reported that the 2 activity was being conducted in a satisfactory 3 manner. However, unofficially, the SA was 4 informed that certain pertinent information which 5 may be considered objectionable was omitted from 6 the official report." 7 MR. EISENHART: Your Honor, I have an 8 objection to that portion of it. Obviously, it's 9 contained in the document; but I would object to 10 it to the extent it purports to be offered for the 11 truth of the statement. It's hearsay and a very 12 controversial issue. And the person who's being 13 referred to here, I believe, is Mr. Twomey, the 14 supervisory agent; and he's the one who can 15 address the truth of it. So, to the extent it's 16 being offered for the truth of the assertion, I 17 object. 18 THE COURT: Well, it's here; and we 19 need all the evidence we can get on the subject. 20 Q. (BY MR. VEIS) Do you know what that 21 refers to, Ms. Carlton? 22 A. Mr. Twomey had discussed it with me and 17242 1 told me that the -- that the auditors -- that the 2 firm did find exceptions in their review but were 3 not willing to put it in writing. 4 Q. Do you know anything else about that? 5 A. No. 6 Q. Now, let me direct your attention to 7 the item under "May 1st, 1988." It indicates, 8 "Examiners were requested to prepare comprehensive 9 management comments for the examination report. 10 As a result, the final report has been delayed 11 until early/mid-May 1988." 12 Do you see that? 13 A. Yes. 14 Q. Do you know anything about that? 15 A. Yes. 16 Q. Okay. And tell us what you know, 17 please. 18 A. About the end of the exam, due to all 19 the management turnover, they wanted a thorough 20 assessment of management. We were asked to obtain 21 resumes, job descriptions, background information 22 on the management, and do an analysis of the 17243 1 information and provide comments in the report on 2 it. 3 Q. Now, I would like to now turn to an 4 Exhibit A14082. Actually, I won't. I'll address 5 that later. 6 Ms. Carlton, I'm handing you a document 7 that's been marked A14073. 8 What is that exhibit? 9 A. It is a copy of the 1987 examination, 10 and it's covered by the supervisory letter that 11 was sent to the board of directors. 12 Q. And in addition, are there some 13 materials beginning after A26.2? That's Bates 14 No. OW077255. 15 Do you see a -- what looks like a 16 computer-generated printout? 17 A. Yes, it is. That's an in-house 18 document that collects the examination hours, the 19 rating system, and certain historical data that we 20 maintain on a database for every institution on. 21 MR. VEIS: I move the admission of 22 A14073. 17244 1 MS. CLARK: No objection. 2 THE COURT: Received. 3 Q. (BY MR. VEIS) Ms. Carlton, you 4 mentioned -- let me direct your attention first to 5 the report summary that begins on Page 1, which is 6 Bates OW077124. 7 A. Okay. 8 Q. Now, you had mentioned something about 9 management in connection with your testimony on 10 the previous exhibit, A14068. 11 Do you recall that? 12 A. Yes. 13 Q. And if you take a look at the first 14 paragraph, you have a comment in the report 15 summary regarding management. 16 Is that related to the earlier entry on 17 the previous exhibit? 18 A. Yes. This is a summary where we 19 summarize what you would find in the management 20 comment of our analysis on management. 21 Q. And then there's a -- in the second 22 paragraph, does that deal with regulatory capital 17245 1 failure? 2 A. Yes, it does. 3 Q. Does that summarize your report 4 concerning the regulatory capital condition of 5 United Savings Association of Texas? 6 A. That's correct. 7 Q. And the third paragraph deals with 8 reserves. 9 Do you see that? 10 A. Right. 11 Q. And does that summarize your findings 12 with respect to the failure to establish adequate 13 specific reserves? 14 A. That's correct. 15 Q. And are those figures the figures that 16 came from the calculations that were reflected in 17 the agendas that were given to the board of 18 directors and to management in the March 30 and 19 March 28th meetings? 20 A. They are. 21 Q. It gives a figure in the following 22 paragraph with respect to appraised losses on 17246 1 loans and real estate owned. 2 How much was that? 3 A. 43 million. 4 Q. Was that number also reflected in the 5 calculations of minimum net worth compliance that 6 were given to management and the board of 7 directors? 8 A. Yes, they were. 9 Q. And in the following paragraph 10 reflecting criticized assets, does that also 11 reflect the calculations as of September 30th that 12 were reflected in the agenda and figures given to 13 the board of directors on March 30th, 1988? 14 A. Yes. 15 Q. Now, I would like to direct your 16 attention to the following paragraph, the one that 17 starts, "USAT has a cumulative negative gap 18 position through the year 2007." 19 A. Right. 20 Q. Now, if you would explain -- I believe 21 you did in connection with the 1986 examination. 22 If you would just briefly explain the 17247 1 meaning of negative gap position. 2 A. What we were addressing here is that 3 hedging activities in which the institution had, 4 in an effort to extend the maturities of their gap 5 between the asset portfolio and their liability 6 portfolio in which you had a mismatch or the yield 7 in which they would mature, had engaged other 8 instruments like swaps and caps that would provide 9 for a longer yield in order to lessen that spread, 10 say, if the assets were, as an example, 8 percent 11 and liabilities were 11 percent, you would attach 12 another instrument that could possibly bring them 13 all to 10 percent, with only 1 percent yield 14 differences versus an original example where you 15 would have, say, 3 percent differences. 16 That's what we were reporting. 17 According to our calculation, it would take until 18 the year 2000 when you would actually have your 19 assets and liabilities on the same matching 20 schedules. 21 Q. 2007? 22 A. 2007. 17248 1 Q. So, that would be 20 years? 2 A. Yes, yes. 3 Q. Now, do you recall in the 1986 report 4 of examination, I believe you made a statement 5 that as of 1986, that the gap was about five 6 years? 7 A. Yes. 8 Q. So, that was 1991 at that point? 9 A. Right. 10 Q. So, they have gone from a five-year 11 negative gap to a 20-year negative gap? 12 A. Right. 13 Q. Now, the following paragraph of your 14 summary deals with a net loss of $40 million under 15 interest rate swaps, caps, and collar agreements. 16 Do you see that? 17 A. Yes. 18 Q. How much was that net loss? 19 $40 million? 20 A. That's correct. 21 Q. Then the following paragraph, I would 22 like to direct your attention to that. It says, 17249 1 quote, "A review of the association's financial 2 futures and options activity as well as activity 3 in its wholly-owned subsidiary, United MBS 4 Corporation, disclosed several speculative 5 transactions," close quote. "This is contrary to 6 Sections 563.17-4 and 563.17-5 (see risk 7 management comment.)" 8 Do you see that? 9 A. Yes. 10 Q. Now what instruments or investments 11 were involved in this speculative activity that 12 you've identified? 13 A. The institution had purchased 14 mortgage-backed securities, and they were using 15 reverse purchase agreements as the funding of 16 those. And they were being hedged by Eurodollar 17 bonds. 18 Q. And let me direct your attention 19 forward. Let me direct your attention forward to 20 Page 17 of the report which is OW077140. 21 A. Okay. 22 Q. Now, if you look at the third full 17250 1 paragraph in the -- on this page, it begins, 2 "During the review period." 3 Do you see that? 4 A. On Page 17? 5 Q. Yes. 6 A. Yes, I see it. 7 Q. Would you please read that paragraph 8 and then read through the carry-over on the -- the 9 following page. There's a sentence that carries 10 over. Please read that to yourself, and I'll have 11 some questions about that. 12 A. (Witness reviews the document.) Okay. 13 Q. Now, do the paragraphs you've just read 14 refer to the -- or are they the speculative 15 transactions referred to on Page 1 in the report 16 summary? 17 A. As part of it, yes. 18 Q. Were there any other speculative 19 transactions? 20 A. On Page 19, there's a continuation of 21 the write-up supporting that. 22 Q. Those are additional speculative 17251 1 transactions in certain hedging instruments; is 2 that correct? 3 A. That's correct. 4 Q. Now -- and the put options and 5 U.S. Treasury notes referred to on Page 17, do you 6 see that? 7 A. Yes. 8 Q. Are those hedging instruments, as well? 9 A. Those are some, yes, that the 10 institution used. 11 Q. So, the speculation you found was with 12 respect to certain of the hedging instruments held 13 at United MBS or the association, correct? 14 A. Yes, it was. 15 Q. Was there any other speculative 16 transaction that you found in connection with the 17 1987 report of examination? 18 A. This was all we recorded. 19 Q. Is that all you found? 20 A. That we had enough documents that we 21 should -- to make an issue of. 22 Q. Let me go back, then, to Page 1 of the 17252 1 report. Actually, turning over to Page 2, it 2 indicates in the last paragraph that the 3 association continues to experience an adverse 4 operating trend? 5 A. Right. 6 Q. Could you please explain what that 7 paragraph refers to? 8 A. It shows that -- what we're stating 9 here, that based on the operating trend that was 10 demonstrated at that point, if that trend 11 continued, that by the fourth quarter 1989, they 12 would have totally not only not met their 13 requirement but totally depleted their net capital 14 and would be ruled insolvent once that happened. 15 Q. And you were aware that they had 16 projected insolvency for themselves within 12 to 17 14 months. Right? 18 A. Right. 19 Q. I would like to address now the 20 management comments. So, if you would turn to 21 Page 3, OW077126. 22 It indicates a turnover of key 17253 1 personnel? 2 A. Correct. 3 Q. And in what sense were they key 4 personnel? 5 A. Meaning that they were either from the 6 VP and up level in the bank. The directors, 7 executive VPs, senior VPs are who we refer to as 8 key officers of the bank and, also, the directors 9 of the institution. 10 Q. Now, I would also like you to take a 11 look at the paragraph that begins in 1984. 12 Do you see that? 13 A. Yes. 14 Q. Now, that says, "In 1984, Mr. Charles 15 Hurwitz, a major stockholder of USAT and director 16 of UFG, hired Mr. Jenard M. Gross to operate 17 USAT." 18 Do you see that? 19 A. Yes. 20 Q. Now, how did you get that information? 21 A. We got it in combination of a 22 discussion with Mr. Gross and a newspaper article. 17254 1 Q. Let me show you an exhibit that's been 2 marked A14067. 3 Ms. Carlton, have you seen this exhibit 4 before? 5 A. Yes, I have. 6 Q. And where did it come from? 7 A. It came out of the work papers. 8 MR. VEIS: I move the admission of 9 A14067. 10 MS. CLARK: No objection. 11 THE COURT: Received. 12 MR. BLANKENSTEIN: Your Honor, I will 13 object to the extent it purports to state the 14 truth of the matter asserted within. If it's only 15 offered for what Ms. Carlton knew at the time she 16 read it, I have no objection if it's offered for 17 that limited purpose. 18 THE COURT: It's received for that 19 purpose. 20 Q. (BY MR. VEIS) Ms. Carlton, let me 21 direct your attention to the third column of the 22 article and the last paragraph. 17255 1 Do you see that? 2 A. Okay. 3 Q. Now, it says here, quote, "The 4 watershed for United came in February 1985 when 5 United Financial Group chairman Charles Hurwitz, 6 46, hired Jenard Gross, a developer and thrift 7 industry veteran, to run the institution." 8 Do you see that? 9 A. Yes. 10 Q. Is that what you were referring to when 11 you spoke of a newspaper article? 12 A. Right. 13 MR. EISENHART: Your Honor, I didn't 14 realize when I first looked at this article; but 15 it appears that this is incomplete. It appears 16 there is a continuation of it. 17 THE COURT: I see that, also. 18 MR. VEIS: Well, Your Honor -- 19 Q. (BY MR. VEIS) Ms. Carlton, is this 20 the entire document that is included in the work 21 papers? 22 A. Yes, it is. 17256 1 Q. So, whatever the continuation is is not 2 in the work papers, correct? 3 A. Right. 4 MR. VEIS: Your Honor, what's in the 5 work papers is what's in the work papers. 6 Certainly, if respondents wish to obtain the rest 7 of the article and put it in evidence, I would 8 have no objection. But I only wish to ask 9 Ms. Carlton about that one sentence which is 10 contained on the page. 11 MR. EISENHART: I'm not sure how useful 12 to the record will be Ms. Carlton's knowledge of 13 half an article. 14 THE COURT: Well, all it shows is that 15 the newspaper reported this and she read it. 16 MR. VEIS: Your Honor, I will follow up 17 on that to tie this down. 18 Q. (BY MR. VEIS) Ms. Carlton, when you 19 read this in the newspaper, did you ask anyone 20 about this? 21 A. We talked to Mr. Gross about the 22 article. 17257 1 Q. And what did Mr. Gross tell you? 2 A. He confirmed the information that I 3 asked him about the article. 4 Q. That he had -- 5 A. That he had been brought in by 6 Mr. Hurwitz. 7 Q. Now, I would like you to take a look at 8 Exhibit -- back to Exhibit A14073 and go on to 9 Page 5. I believe there had been some discussion 10 in prior documents about the experience level of 11 management. 12 Do you recall that? 13 A. Yes. 14 Q. Now, I would like to direct your 15 attention to the first paragraph after the listing 16 of individuals on Page 5. It says, "The senior 17 management staff has an average tenure of three 18 years with only two officers having prior savings 19 and loan experience. Four of these officers have 20 banking experience. The remaining officers' 21 backgrounds are in real estate and marketable 22 securities." 17258 1 Do you see that? 2 A. Yes. 3 Q. Does that accurately reflect the 4 experience levels in the list of officers in the 5 preceding two pages: 3 and 4? 6 A. Yes, it does. 7 Q. What's the differences between banking 8 experience and savings and loan experience? 9 A. Banking experience -- back in the 10 Eighties, savings and loans were basically allowed 11 only to do single-family lending with banks being 12 advanced over the thrift industry doing commercial 13 inventory type lending. 14 Savings and loans were beginning to 15 move into real estate development lending and 16 other areas; but typically, that was not the 17 activity of a thrift. 18 Q. Now, you then have comments on 19 effectiveness of management. 20 Do you see that? 21 A. Right. 22 Q. You note, quote, "Management's past and 17259 1 current unsafe and unsound lending practices have 2 resulted in substantial substandard and 3 non-earning assets which, in turn, have severely 4 impacted operating results and regulatory 5 capital." 6 Do you see that? 7 A. Yes. 8 Q. Now, in that comment, are you referring 9 to the findings or the classification of assets 10 that's noted in the calculations that were 11 provided to the management and board of directors 12 during the nineteen -- the March 28th and 13 March 30th, 1988 meetings? 14 A. Yes, I am. 15 Q. Now, let me ask you about -- let's move 16 forward to -- to Page 6. 17 If you would take a look at -- at the 18 top two paragraphs. Would you read those, please, 19 to yourself? 20 A. (Witness reviews the document.) Okay. 21 Q. Now, this refers to aggressive actions 22 by management? 17260 1 A. Yes. 2 Q. Would you please explain that? 3 A. Management had basically tried 4 everything. They had tried to diversify their 5 portfolio. At one point, they had tried to grow 6 the portfolio and increase its assets. They had 7 tried shrinking the balance sheet and reducing 8 some of the activity. They had moved the 9 portfolio from a lending portfolio and diversified 10 into securities areas. And all those strategies 11 had proven to be ineffective, and the institution 12 was now in a state of question as to being a 13 future ongoing concern corporation. 14 Q. They had incurred substantial risk in 15 conducting those other actions? 16 A. Yes, when they diversified the 17 portfolio. 18 Q. So, they incurred risk and got no 19 results. Is that what you're saying? 20 A. Only additional losses. 21 Q. Directing your attention to Page 12, do 22 you see the item headed "capital"? 17261 1 A. Yes. 2 Q. If you would, just quickly read through 3 that. I have just a very brief question about it. 4 A. (Witness reviews the document.) 5 Q. I think it carries through to Page 13. 6 A. (Witness reviews the document.) Okay. 7 Q. Now, does this section on "capital" in 8 the final report of examination essentially 9 reiterate the calculations with respect to the 10 institution's minimum regulatory capital 11 requirement and its compliance with that 12 requirement that you had previously submitted to 13 the board in the March 30, 1988 agenda? 14 A. Yes, it does. 15 Q. So, the final -- final result is that 16 your report indicates that USAT failed to meet its 17 minimum regulatory capital requirement by 18 $112,551,000 as of December 31st, 1987, correct? 19 A. That's correct. 20 Q. And the calculations supporting that 21 are those that are set forth in the attachments to 22 the agendas for the exit meeting with management 17262 1 and the special meeting of the board of directors, 2 correct? 3 A. That's correct. 4 Q. Let me then direct you to Page 14, 5 which is OW077137. That refers to asset/liability 6 management? 7 A. Right. 8 Q. Now, you had a comment in the summary 9 concerning the cumulative negative gap position 10 through the year 2007? 11 A. Yes. 12 Q. Does this section which carries through 13 Page 15 reflect your findings with respect to the 14 gap position of United Savings Association of 15 Texas? 16 A. Yes, this is the detailed write-up of 17 it. 18 Q. Now, let me, just for a moment, direct 19 you back to Page 6 of the report under the item 20 "conflict of interest." 21 Do you see that? 22 A. Yes. 17263 1 Q. It refers here to Mr. Stanley Rosenberg 2 and refers to loans aggregating $96 million? 3 A. Right. 4 Q. Now, if you recall, in conjunction with 5 one of your interim reports, we discussed 6 Mr. Rosenberg, correct? 7 A. That's correct. 8 Q. And does this section reiterate the 9 information contained in your interim reports? 10 A. Yes, it does. 11 Q. And was there any change in your views 12 as to Mr. Rosenberg's transactions between your 13 interim report and your final report? 14 A. This information is the same. 15 Q. Let me direct your attention to Page 28 16 of the report of examination, particularly under 17 the item "United MBS Corporation." 18 A. Okay. 19 Q. Would you please just read those, and 20 then I'll have some questions. 21 A. (Witness reviews the document.) Okay. 22 Q. The second paragraph of that section 17264 1 says, "Mortgage-backed securities makeup 2 96.0 percent of UMBS's 1.6-billion-dollar 3 portfolio at December 31, 1987, while reverse 4 repurchase and dollar roll obligations make up 5 91.0 percent of UMBS's total liabilities of 6 approximately 1.5 billion." 7 Do you see that? 8 A. Right. 9 Q. Is that your recollection of the makeup 10 of UMBS's asset portfolio and its liabilities? 11 A. It is. 12 Q. It says in the following paragraph, 13 "UMBS generates income by entering into reverse 14 repurchase and dollar roll contracts 15 collateralized by their FNMA, GNMA, and FHLMC 16 mortgage-backed securities. UMBS is operating 17 profitably at December 31, 1987, with a 18 year-to-date net income of $37,479,000." 19 Do you see that? 20 A. Yes. 21 Q. Do you recall that being the case from 22 your 1987 examination? 17265 1 A. Right. 2 Q. Now, is there anything in that section 3 that indicates to you that United Savings 4 Association of Texas had made sales out of the 5 mortgage-backed securities portfolio for the 6 purpose of generating a gain to bolster profits? 7 A. No. 8 Q. I would like now for you to turn to 9 Page A12.1. That's Bates No. OW077167. 10 MR. EISENHART: This appears to be 11 missing from our copies. 12 MR. VEIS: Perhaps I can help you, 13 Mr. Eisenhart, if -- 14 15 (Discussion held off the record.) 16 17 MR. VEIS: Your Honor, is it reflected 18 in your copy? 19 THE COURT: I have that copy. 20 MS. CLARK: I think the problem is on 21 our side of the table. I have my copy. 22 MR. VEIS: We have an extra copy, if it 17266 1 would help. 2 THE COURT: All right. Let's proceed. 3 MR. BLANKENSTEIN: Is it okay if I walk 4 and stand behind -- 5 THE COURT: Your copy doesn't have 6 those pages? 7 MR. BLANKENSTEIN: My copy doesn't have 8 those pages either. 9 THE COURT: Do you have another copy 10 for Mr. Blankenstein? 11 MR. VEIS: No. 12 13 (Discussion held off the record.) 14 15 Q. (BY MR. VEIS) Let me direct your 16 attention then to A12.1. What is A12.1? And I 17 think it carries over to A12.2. 18 A. It's a summary of the loans that were 19 classified during the 1987 exam. 20 Q. And we saw a similar document attached 21 to the 1986 report of examination, did we not? 22 A. That's correct. 17267 1 Q. And this is actually a table of 2 contents that would direct a reader to the full 3 write-up on each of those classified assets? 4 A. Yes, it would. 5 Q. And the page number is noted in the 6 right-hand column? 7 A. Correct. 8 Q. Now, just very briefly, if I could 9 address your attention to -- under (A), "Mortgage 10 loans and contracts," there are entries under 11 "loans classified during the previous examination" 12 of Couch Mortgage Company and Norwood. 13 Do you see that? 14 A. Yes. 15 Q. Does that indicate management's 16 continued disagreement with the classification of 17 those loans? 18 A. Correct. 19 Q. Now I would like to direct your 20 attention to the following page, A12.2 under the 21 item "other assets." 22 A. Yes. 17268 1 Q. Do you see an entry there for 2 Norwood/United Park J.V.? 3 A. Right. 4 Q. And it indicates a 9.4-million-dollar 5 entry substandard? 6 A. Right. 7 Q. Is that the same $9.4 million that was 8 reflected with respect to Norwood in the materials 9 that were attached to the board of directors 10 meeting agenda? 11 A. Yes, it is. 12 Q. And that's an investment by a 13 subsidiary of the association? 14 A. Right. 15 Q. And they are disagreeing with that 16 classification, correct? 17 A. Yes. 18 Q. Let me then direct you to A12.13, which 19 is at OW077179, and carrying over to the following 20 page, A12.14. 21 What is -- what do these pages 22 represent? 17269 1 A. This is a detailed summary of our 2 write-up of the loan to Norwood/United Park. It 3 sets out the terms of the payment, and it provides 4 a comment which shows why the loan was classified. 5 It goes on to show whether management agreed or 6 disagreed with it. It shows the examiner that 7 reviewed the credit and, also, the loan officer as 8 far as approval of it, that it was approved by a 9 committee. 10 Q. That's the write-up that justifies the 11 classification, correct? 12 A. That's correct. 13 Q. Let me direct your attention, then, to 14 A12.22 and carrying through through A12.30. 15 I believe this is divided into four 16 separate listings of classified assets. Perhaps 17 only three. 18 MS. CLARK: Are you asking about 19 A12.22, Mr. Veis? 20 MR. VEIS: I will be asking about 21 A12.22 through 30. 22 THE COURT: Is there a question 17270 1 pending? 2 MR. VEIS: I was waiting to see if 3 Ms. Carlton had finished her review. There is no 4 question pending. 5 Q. (BY MR. VEIS) Have you had a chance 6 to briefly review them? 7 A. I've gone through to see what they 8 were. 9 Q. Now, do these pages reflect the 10 write-ups of assets that were classified in which 11 Stanley Rosenberg had some connection? 12 A. Yes, it does. 13 Q. And are they the assets you refer to 14 and discuss as possible conflicts with 15 Mr. Rosenberg? 16 A. Yes, it is. 17 Q. Are they the assets you refer to when 18 you give a figure of $96 million in loans with 19 which Mr. Rosenberg had some affiliation? 20 A. Yes, it is. 21 Q. It is noted that Mr. Rosenberg is a 22 director of MCO Holdings? 17271 1 A. It is noted. 2 MS. CLARK: Your Honor, let's note for 3 the record that this is not -- these write-ups 4 contain two loans that are not at issue in this 5 case. Although Mr. Veis is determined to ask her 6 about them, I don't want the record to reflect 7 that we're agreeing to expand the Notice of 8 Charges to include these transactions. 9 THE COURT: Thank you. I think these 10 loans are not in issue, and I gather that they 11 only support your elements as to Mr. Rosenberg 12 MR. VEIS: That's right, Your Honor. I 13 have no further questions. They simply go to the 14 issue of Mr. Rosenberg's conflict of interest and 15 to the extent it bears on Mr. Hurwitz's influence 16 over the institution. 17 I am finished asking questions. I 18 established that the loans took place to 19 Mr. Rosenberg and that Mr. Rosenberg was a 20 director of MCO Holdings. 21 Q. (BY MR. VEIS) Let me direct your 22 attention to Page A12.57, which is AOW077223. 17272 1 A. Okay. 2 Q. What is this page? 3 A. This is the write-up of the joint 4 venture investment into the Norwood partnership. 5 Q. And does it indicate that United 6 Financial Corporation's proportionate sure of the 7 United/Norwood Park venture? 8 A. It owned 62.5 percent. 9 Q. And United Park owned what? 10 A. 37.5 percent. 11 Q. This is an asset that is classified 12 substandard? 13 A. Yes, it is. 14 Q. And management disagreed? 15 A. Right. 16 Q. I would like to direct your attention 17 to the -- very close to the back of the 18 examination report. If you would look at 19 OW077255. 20 Does that indicate the total hours 21 spent on the examination and the areas in which 22 the hours were spent? 17273 1 A. That's correct. 2 Q. And how many hours were those 3 altogether? 4 A. 5,457 hours. 5 Q. That's slightly longer even than the 6 1987 examination -- 7 A. That's correct. 8 Q. -- which you testified was quite a long 9 examination, correct? 10 A. Right. 11 Q. Now, let's turn to the next page, 12 OW077256. 13 Does this page reflect the ratings 14 given to the institution as a result of the report 15 of examination? 16 A. They would have known only the 17 composite rating. 18 Q. Does this reflect the ratings given? 19 A. Right. 20 Q. The composite rating was what? 21 A. A "4." 22 Q. And management? 17274 1 A. "3." 2 Q. Is "3" a good rating? 3 A. No, it's not. 4 Q. And if you would explain, please, how 5 is that not a good rating? 6 A. A "3" rating on management means that 7 there have been violations noted in their review 8 and that management had not been effective in 9 discharging their duties and responsibilities as 10 officers and directors. And that would have been 11 based on the actual earnings, lack of earnings of 12 the institution, and the position of asset 13 quality. 14 When we evaluate management, management 15 is rated across the board based on all the other 16 areas, meaning that they are no better -- their 17 performance is measured by their performance in 18 assuring that asset quality, capital, risk 19 management, and operating results are carried out 20 in a profitable manner. 21 Q. Now, let me direct your attention to 22 asset quality. That's a "4"? 17275 1 A. Correct. 2 Q. What was that based on? 3 A. That was based on the high level of 4 classified assets, the appraisal deficiencies that 5 were noted, the service corporation, losses that 6 were picked up through the equity investment area, 7 the risk exposure in the institution, and the 8 securities market activity that was classified. 9 Q. Now, what about the "5" rating in 10 capital adequacy? 11 A. The "5" rating in capital basically 12 means that you have an institution that is an 13 ongoing concern at that point. Insolvency was 14 projected to be within the next 12 to 14 months, 15 and either a capital infusion or some type of 16 capital arrangement would have to be made at that 17 point. 18 Q. "5" is the worst you can get. Right? 19 A. Right. 20 Q. Risk management, they are given a "3." 21 Can you explain that? 22 A. In risk management, you -- that's their 17276 1 ability to manage the borrowings of the 2 institution deposits and how those funds are 3 related and used in the funding of the operations 4 of the bank. 5 So, it was rated a "3" with brokered 6 deposits being rated a "4" due to the high level 7 that the institution had had to resort to at that 8 point in order to fund the activity. 9 Q. Is "3" a good rating? 10 A. No, it's not. 11 Q. Let's address operating results. 12 There's a "4" rating there. 13 Why is that? 14 A. Because at that point, the institution 15 was experiencing operating losses every quarter. 16 And the -- both the trend and stability going 17 forward didn't appear to have changed. Therefore, 18 we were not looking to have a reversal of the 19 trend that had been exhibited at the time of the 20 review. 21 Q. Now, let me address your attention, 22 then, to the last page of the report of 17277 1 examination: OW077262. That would be the last 2 page of the document. 3 A. Okay. 4 Q. Is there an entry there where it 5 discusses investment brokers? 6 A. Yes, there is. 7 Q. And it indicates the names of the top 8 three investment brokers by volume? 9 A. Right. 10 Q. Who is the top investment broker by 11 volume? 12 A. Drexel Burnham. 13 MR. VEIS: Your Honor, if I might have 14 a moment. 15 THE COURT: All right. We'll take a 16 short recess. 17 MR. VEIS: Thank you, Your Honor. 18 19 (Whereupon, a short break was taken 20 from 10:21 a.m. to 10:44 a.m.) 21 22 THE COURT: We'll be seated, please. 17278 1 We'll be back on the record. 2 Mr. Veis, you may continue. 3 MR. VEIS: Thank you, Your Honor. 4 Q. (BY MR. VEIS) Ms. Carlton, I would 5 like to show you now an exhibit that's been marked 6 A14081. 7 Do you recognize 14081? 8 A. It's a copy of the investment policy 9 for the institution. 10 Q. And did it come from the work papers 11 from the 1987 examination of United Savings 12 Association of Texas? 13 A. Yes, it did. 14 Q. Was it provided to the examiners by the 15 institution during that examination? 16 A. Yes, it was. 17 MR. VEIS: Your Honor, I move the 18 admission of A14081. 19 MS. CLARK: No objection. 20 THE COURT: There's another copy of it 21 in the record. Does this have some special -- 22 MR. VEIS: Yes, Your Honor, it does. 17279 1 THE COURT: All right. Received. 2 Q. (BY MR. VEIS) Ms. Carlton, I would 3 like to direct your attention to the bottom of the 4 first page. 5 Do you see some handwritten comments 6 down there? 7 A. Yes. 8 Q. I will -- well, first off, do you 9 recognize the initials under those handwritten 10 comments? 11 A. It's Jack Purvis. 12 Q. Who was Jack Purvis? 13 A. He was an examiner on the '87 exam. 14 Q. And he worked for you? 15 A. Yes, he did. 16 THE COURT: When we're talking about 17 '87 exam, which one? 18 MR. VEIS: The 1987 exam. 19 THE COURT: They both were, more or 20 less, in '87. 21 MR. VEIS: No, Your Honor. The first 22 examination commenced May 26, 1986. The field 17280 1 work went through early October of '86. The final 2 report of the examination was delivered in 1987. 3 We've referred to it as the 1986 examination 4 because that's the "as of" date. 5 The examination we're referring to here 6 is the one that commenced November 17th, 1987. 7 THE COURT: All right. 8 Q. (BY MR. VEIS) Do I have the date 9 correct, Ms. Carlton? 10 A. Right. 11 Q. Let me direct your attention to the 12 handwritten note there. It says, "I believe per a 13 discussion with CFO Michael Crow." And then 14 there's a carrot which appears to insert the line 15 above: "At 11/24/87, United's investment policy 16 has not changed in any way from the date of this 17 stated policy. All items of this policy remain in 18 effect and are adhered to by all concerned 19 parties." Then it has the initials "JBP." 20 Do you see that? 21 A. Yes. 22 Q. Now, the heading, it says it's the 17281 1 United Financial Group, Inc. investment policy. 2 Do you see that? 3 A. Yes. 4 Q. I take it it's also the investment 5 policy for United Savings Association of Texas. 6 Right? 7 A. Yes. 8 Q. You didn't examine holding companies in 9 those days, did you? 10 A. No, we did not. 11 Q. And the date is May 27, 1986? 12 A. Yes. 13 Q. Does this, then, reflect Mr. Crow's 14 representation that the investment policies of 15 United Savings Association of Texas had not 16 changed in the period from May 27, 1986, through 17 November 24th, 1987? 18 A. This is what the examiner wrote as what 19 he was told by Mr. Crow. 20 Q. And he was told that in his capacity as 21 an examiner. Right? 22 A. Right. 17282 1 Q. Now, you've previously reviewed this or 2 a separate copy of this investment policy, 3 correct? 4 A. Correct. 5 Q. And do you recall that you had 6 testified earlier that that investment policy did 7 not indicate to you that USAT intended to make or 8 had made -- let me start over. 9 You testified previously that the 10 investment policy did not indicate to you that 11 USAT intended to make sales out of the 12 mortgage-backed securities portfolio or the 13 high-yield bond portfolio for the purpose of 14 generating a gain to bolster profits? 15 A. Right. 16 Q. Did that remain your understanding in 17 the 1987 examination? 18 A. Correct. 19 Q. I would like to now direct your 20 attention to Exhibit A14095. 21 Ms. Carlton, what is A14095? 22 A. It's a memo to the file on a meeting in 17283 1 which several examiners and I attended of the 2 investment committee of UFG. 3 MR. VEIS: Your Honor, I move the 4 admission of A14095. 5 MS. CLARK: No objection. 6 THE COURT: Received. 7 Q. (BY MR. VEIS) That was on 8 January 6th, 1988? 9 A. Correct. 10 Q. Now, in connection with that meeting, 11 were you provided copies of a previous meeting of 12 the investment committee? 13 A. Yes, we were. 14 Q. And were you provided a copy of an 15 earlier meeting of a -- an investment 16 subcommittee? 17 A. Right. 18 Q. I would like to show you two documents: 19 A14088 and A14089. Take a moment to look at 20 those, please. 21 A. (Witness reviews the documents.) Okay. 22 MR. VEIS: Your Honor, it's been 17284 1 pointed out to me that one of the earlier 2 exhibits, A14081, was previously submitted at 3 Tab 1397. I'm sorry for the confusion. I'm 4 informed it is the identical document with the -- 5 THE COURT: Well, I raised the point. 6 You said you wanted them both in, as I understood 7 it. 8 MR. VEIS: I'm sorry. I had understood 9 from my staff that it had not come in. I 10 apologize for the confusion. 11 Q. (BY MR. VEIS) Ms. Carlton, have you 12 had a chance to review the two documents that have 13 been placed before you? 14 A. Yes. 15 Q. What is A14088? 16 A. It's a copy of the investment committee 17 minutes for UFG and USAT. 18 Q. And what is 14089? 19 A. It is a copy of the minutes of the 20 investment subcommittee of the institution. 21 Q. Are those the minutes of the investment 22 committee -- that's A14088 -- that was provided to 17285 1 you at the meeting reflected in A14095, the 2 January 6th meeting? 3 A. This is -- yes. 4 Q. And A14089, is that the minutes of the 5 investment subcommittee that was provided to you 6 at the January 6th meeting? 7 A. Yes. 8 MR. VEIS: Your Honor, I move the 9 admission of A14088. 10 MS. CLARK: No objection. 11 THE COURT: Received. 12 MR. VEIS: I also move the admission of 13 A14089. 14 MS. CLARK: No objection. 15 THE COURT: Received. 16 Q. (BY MR. VEIS) Now, did you have an 17 opportunity to review A14088, the investment 18 committee meeting, before you testified today? 19 A. Yes, I did. 20 Q. I would like to direct your attention 21 to the last page which is Bates No. OW181010. 22 Do you see a note at the bottom? 17286 1 A. Yes. 2 Q. What does that note say? 3 A. "These minutes represent an example of 4 the results of a regular meeting of the investment 5 committee." 6 Q. And is that what you were told by USAT 7 management? 8 A. Right. 9 Q. Now, I would like you to look at the 10 last page of A14089, which is Bates No. OW180139. 11 Do you see a note at the bottom of that 12 page? 13 A. Yes. 14 Q. What does that note say? 15 A. "These minutes of investment 16 subcommittee demonstrate association practices 17 when a regular meeting of the investment committee 18 is impractical." 19 Q. Now, was that what was represented to 20 you by United Savings Association of Texas 21 management? 22 A. Yes. 17287 1 Q. I would like to direct your attention 2 back to Exhibit A14088, the minutes of the 3 investment committee. 4 Now, you just said that you had had the 5 opportunity to review them before testifying, 6 correct? 7 A. Right. 8 Q. Now, during that review, did you see 9 anything in that exhibit that indicated to you 10 that USAT intended to make sales out of the 11 mortgage-backed securities portfolio for the 12 purpose of generating a gain to bolster profits? 13 A. No. 14 Q. Did you see anything in A14088 that 15 indicated to you that USAT intended to make sales 16 out of the high-yield bond portfolio for the 17 purpose of generating a gain to bolster profits? 18 A. No. 19 Q. Did you see anything in A14088 that 20 indicated to you that USAT had made any sales out 21 of the mortgage-backed securities portfolio for 22 the purpose of generating a gain to bolster 17288 1 profits? 2 A. No. 3 Q. Did you see anything in A14088 that 4 indicated to you that USAT had made sales out of 5 the high-yield bond portfolio for the purpose of 6 generating a gain to bolster profits? 7 A. No. 8 Q. Now, let's turn to A14089. 9 Now, you had indicated that you had an 10 opportunity to review these minutes before 11 testifying, as well. Right? 12 A. Right. 13 Q. Now, did you see anything in A14089 14 that indicated to you that USAT intended to make 15 sales out of the mortgage-backed securities 16 portfolio for the purpose of generating a gain to 17 bolster profits? 18 A. No. 19 Q. Did you see anything in A14089 that 20 indicated to you that USAT had made sales out of 21 the mortgage-backed securities portfolio for the 22 purpose of generating a gain to bolster profits? 17289 1 A. No. 2 Q. Now, what about out of the high-yield 3 bond portfolio? Is there any indication in A14089 4 that USAT intended to make sales out of the 5 high-yield bond portfolio for the purpose of 6 generating a gain to bolster profits? 7 A. No. 8 Q. Is there any indication that USAT had 9 made such sales for the purpose of generating a 10 gain to bolster profits? 11 A. No. 12 Q. Let me show you a document that's been 13 marked A14090. 14 Ms. Carlton, do you recognize A14090? 15 A. Yes. 16 Q. Is it a document that was provided to 17 the examination team by management of USAT? 18 A. It is. 19 Q. Is it included in the work papers from 20 the 1987 examination of USAT? 21 A. It is. 22 MR. VEIS: Your Honor, I move the 17290 1 admission of A14090. 2 MS. CLARK: No objection. 3 THE COURT: Received. 4 Q. (BY MR. VEIS) Ms. Carlton, there's a 5 title across the top that says, "Notes for 6 regulators on United's use of caps, swaps, and 7 Eurodollar futures." 8 A. Correct. 9 Q. And you take it that this document was 10 prepared specifically for the examination team? 11 A. It was. 12 Q. Do you understand this document to 13 refer to hedging activity? 14 A. It was provided, yes, as to provide the 15 procedures and the use in which they used that in 16 their hedging activity. 17 Q. So, this was a statement by the 18 management of United Savings Association of Texas 19 indicating the use they made for each of the types 20 of instruments listed on the document? 21 A. Correct. 22 Q. Let's take a look at this, then. 17291 1 There's a heading there "futures." 2 Do you see that? 3 A. Right. 4 Q. It says, quote, "United uses Eurodollar 5 futures short positions to extend the maturity of 6 its monthly floating rate reverse repo 7 liabilities." 8 Do you see that? 9 A. Right. 10 Q. Is that an activity that would fall 11 under the heading of "hedging"? 12 A. Yes, it is. 13 Q. Is there an indication of doing 14 anything else other than hedging with the futures 15 positions? 16 A. No. 17 Q. Let's look down at swaps. It says 18 here, "United uses swaps for the same purpose that 19 it uses futures." 20 Do you see that? 21 A. Yes. 22 Q. So, I take it that swaps were also used 17292 1 for hedging purposes? 2 A. Right. 3 Q. And for no other purpose? 4 A. Right. 5 Q. Now, it indicates a discussion of caps, 6 as well. 7 Do you see that? 8 A. Yes. 9 Q. I would like you to turn to OW0 -- I'm 10 sorry -- OW180566. 11 A. Okay. 12 Q. Do you see the first sentence there? 13 It says, quote, "The cap accomplishes a maturity 14 extension of floating rate repo liabilities much 15 the same way that a swap does." 16 Do you see that? 17 A. Yes. 18 Q. Is that a description of the use to 19 which you understood United Savings Association of 20 Texas was putting its cap instruments? 21 A. It is, yes. 22 Q. And that's a hedging activity? 17293 1 A. Right. 2 Q. So, it's your understanding, then, that 3 all three instruments listed here -- futures, 4 swaps, and caps -- were used to extend the 5 maturity of monthly floating rate reverse repo 6 liabilities. Right? 7 A. Right. 8 Q. Now, is there any indication that there 9 was any use other than hedging? 10 A. No. That was what it was purported to 11 be. 12 Q. Let me show a document marked A14091. 13 Ms. Carlton, do you recognize 14 Exhibit A14091? 15 A. It's another document that was found in 16 the work papers. 17 Q. Was it provided to the examination 18 staff by the management of United Savings 19 Association of Texas? 20 A. Yes, it was. 21 Q. And what does this document tell the 22 examination staff? 17294 1 A. It tells the purpose and accounting 2 guidelines for United MBS Corporation. 3 Q. And that was a subsidiary of United 4 Savings Association of Texas? 5 A. Yes, it was. 6 Q. Let's read the purpose. It says, 7 "Purpose of subsidiary: To create an arbitrage 8 which produces a hedged net interest spread 9 between mortgage-backed securities assets and 10 various funding sources over a two-year time 11 horizon." 12 Do you see that? 13 A. Yes. 14 Q. Now, this document was given to the 15 examination staff during the 1987 report of 16 examination? 17 A. Correct. 18 Q. And was the examination staff told that 19 this was the purpose of the subsidiary? 20 A. Right. 21 Q. Now, is there anything related to that 22 purpose that would indicate to you that USAT 17295 1 intended to make sales out of the mortgage-backed 2 securities portfolio for the purpose of generating 3 a gain to bolster profits? 4 A. No. 5 Q. Let me show you a document that's been 6 marked A14092. 7 MR. VEIS: Your Honor, I'm not sure I 8 moved the admission of A14091. 9 MS. CLARK: No objection. 10 THE COURT: Received. 11 MR. VEIS: Thank you, Your Honor. 12 Q. (BY MR. VEIS) Ms. Carlton, let me 13 show you A14092. 14 MR. VEIS: Your Honor, I understand a 15 copy of a similar document with different Bates 16 numbers may be in the record. This is the 17 document that was actually found in the work 18 papers and bears the Bates numbers from the 19 respondents' imaging of the work papers. I 20 believe it would be appropriate to include it as a 21 separate exhibit since this is the actual document 22 Ms. Carlton has seen. 17296 1 Q. (BY MR. VEIS) Ms. Carlton, do you 2 recognize A14092? 3 A. This is a copy of the Prudential-Bache 4 report when it did the third-party review of USAT. 5 Q. And was that report provided to you in 6 your capacity as the examiner-in-charge of the 7 1987 examination of USAT? 8 A. Yes, it was. 9 Q. Was it included in the -- I believe 10 it's called the general file? 11 A. It was included with the review of the 12 investment securities. 13 Q. And that was given to you by the 14 supervisory branch of the Federal Home Loan Bank? 15 A. Right. 16 Q. Now, have you had an opportunity to 17 review A14092? 18 A. Yes, I have. 19 Q. Is there anything in Exhibit A14092 20 that would indicate to you that USAT had made 21 sales out of the high-yield bond portfolio for the 22 purpose of generating a gain to bolster profits? 17297 1 A. None stated. 2 Q. Is there anything that would indicate 3 to you that USAT intended to make sales out of the 4 high-yield bond portfolio for the purpose of 5 generating a gain to bolster profits? 6 A. No. 7 THE COURT: I believe you offered this. 8 I'm not sure I received it. 9 Do you have any objection, Ms. Clark? 10 MS. CLARK: No, I have no objection. I 11 think the one that's previously in the record came 12 out of the files of the supervisory side, the 13 Neil Twomey part of the agency. And I think he 14 wants to put this in to show it's also in the 15 examination work papers. For that purpose, we 16 have no objection. 17 THE COURT: Received. 18 Q. (BY MR. VEIS) Ms. Carlton, let me 19 show you a document that's been marked A14082. 20 Do you recognize A14082? 21 A. It is the narrative draft of -- a 22 comment draft by Jack on the -- his review of 17298 1 investment grade junk bonds. 2 Q. Is it included from the work papers or 3 in the work papers of the 1987 examination? 4 A. Yes, it was. 5 MR. VEIS: Your Honor, I move the 6 admission of A14082. 7 MR. EISENHART: Your Honor, I have one 8 question. Did she identify an author for this? 9 Is she the author? 10 THE WITNESS: No. It's Jack Purvis. 11 MR. EISENHART: Thank you. 12 MS. CLARK: No objection. 13 THE COURT: Received. 14 Q. (BY MR. VEIS) Now, this represents 15 Mr. Purvis' work product in connection with a 16 review of the junk bond portfolio? 17 A. Yes, it does. 18 Q. I would like to direct your attention 19 to the fourth page -- I'm sorry -- the third page, 20 OW180178. 21 Are you there? 22 A. Yes. 17299 1 Q. Now, I would like to read a sentence -- 2 I believe it's one sentence there. It begins in 3 the second line, "Each investment is followed for 4 signs of unusual market performance by any issuer 5 or the industry in which the issuer is involved. 6 If the unusual market performance is noteworthy or 7 if an investment underperforms the general market, 8 a determination is made to maintain or liquidate 9 the investment," end quote. 10 Do you see that? 11 A. Yes. 12 Q. Now, is there anything in those 13 sentences that would indicate to you that United 14 Savings Association of Texas intended to make 15 sales out of the high-yield bond portfolio for the 16 purpose of generating a gain to bolster profits? 17 A. No. 18 Q. Is there anything in those sentences 19 that indicates to you that USAT had made sales out 20 of the high-yield bond portfolio for the purpose 21 of generating a gain to bolster profits? 22 A. No. 17300 1 Q. Let me now show you a document that's 2 been marked A14093. 3 Ms. Carlton, do you recognize A14093? 4 A. Yes. 5 MR. VEIS: I'm sorry. Is there some 6 confusion regarding -- 7 MS. CLARK: We're fine. It just wasn't 8 in my book. I've been provided a copy by 9 Mr. Eisenhart. 10 Q. (BY MR. VEIS) What is A14093, 11 Ms. Carlton? 12 A. This is a copy of a memo that was 13 provided by one of the individuals in the interim 14 audit department to Jack in his review of 15 investment securities in which he explained who 16 reviews and conducts the review of the investment 17 securities, equity arbitrage, and the gains and 18 sales on mortgage-backed securities. 19 Q. Was it included as part of the 20 examination work papers? 21 A. Yes, it was. 22 MR. VEIS: I move the admission of 17301 1 A14093, Your Honor. 2 MS. CLARK: No objection. 3 THE COURT: Received. 4 Q. (BY MR. VEIS) Now, it says here that, 5 essentially, Peat, Marwick, Main & Company 6 performs the annual audit of USAT. 7 Is that the thrust of this memo? 8 A. That's correct. 9 Q. And the third paragraph states, quote, 10 "The auditor's opinion given by Peat Marwick for 11 the annual audit covers whether the investment 12 securities were accounted for properly. The 13 external auditors are involved with the 14 association on an ongoing basis and deal with 15 accounting issues as they arise." 16 Do you see that? 17 A. Yes. 18 Q. Is that the representation that was 19 made by management of United Savings Association 20 of Texas? 21 A. Yes, it is. 22 Q. Now, I would like to go back for a 17302 1 moment to Exhibit A14070, which is the March 10, 2 1988 interim report of examination. 3 May I assist you in finding that, 4 Ms. Carlton? 5 A. I'm getting it. What's the number 6 again? 7 Q. A14070. And particularly, I would like 8 you to look to the third page of Exhibit A14070, 9 which is Bates OW128901. 10 A. Okay. 11 Q. Now, look at the third paragraph under 12 "investment securities." 13 Well, let's just discuss that. I think 14 that you described this section of the interim 15 report, and you indicated that you were unable to 16 discern clearly the differences between the 17 legitimate or possible speculative transactions in 18 the securities portfolios. 19 MS. CLARK: Objection, Your Honor. 20 This is not the language of the witness, and it's 21 argumentative. 22 THE COURT: Sustained. 17303 1 Q. (BY MR. VEIS) Well, let me direct 2 your attention to the second paragraph of the 3 "investment securities" section, particularly the 4 last sentence. 5 Do you see that? 6 A. Yes. 7 Q. Now, if you would -- it may be 8 repetitive, but what does that last sentence 9 indicate? 10 What did you mean when you said that in 11 the report? 12 A. When we said that in the report, based 13 on our review of their hedging activity, it 14 demonstrated the possible speculation -- 15 speculative transactions and speculative activity 16 that was taking place in regards to their hedging 17 activity. 18 Q. But you couldn't discern the difference 19 between legitimate or possible speculative 20 activity based on the books and records, correct? 21 A. We didn't have all the information that 22 we needed, yes. 17304 1 Q. And that remained true through the rest 2 of the examination, correct? 3 A. Right. 4 Q. Now -- well, it indicates in the next 5 paragraph there was a consultation with 6 Peat Marwick, correct? 7 A. Correct. 8 Q. And what were the results of that 9 consultation? 10 A. Because the management had purported to 11 us that the auditors had believed the hedging 12 activity -- that that hedging activity was, 13 indeed, accounted for properly, we wanted to meet 14 with them in person to discuss the matter; and 15 such meeting was held. 16 Q. And that meeting discussed not only the 17 hedging activity but also the other investment 18 securities. Right? 19 A. Right. 20 Q. And that's indicated in this sentence, 21 is it not? 22 A. Right. 17305 1 Q. It says, "Consultations with the 2 association's independent auditors revealed that 3 the association has properly accounted for its 4 investment securities and hedge accounting 5 activities," correct? 6 A. That's correct. 7 Q. And in Exhibit A14093, management told 8 you that Peat Marwick had indicated that the 9 investment securities were accounted for properly, 10 correct? 11 A. That's correct. 12 Q. So, now, you then at some point 13 consulted with Peat Marwick. Let me show you a 14 document that's been marked A14094. 15 Do you know what A14094 is? 16 A. Yes. This is a copy of a cover sheet 17 of the review of the independent audit report 18 followed by a management letter which sets out 19 numerical pages also of the financial report 20 for -- ending -- for December '86 and '85 and the 21 management letter addresses exceptions noted by 22 the auditors along with management's response as 17306 1 to what they either had or would do to correct 2 those exceptions noted. 3 Q. Now, this relates to the audit of 4 United Savings Association of Texas' financial 5 statements for the year ended December 31st, 1986; 6 is that correct? 7 A. That's correct. 8 Q. And at the time you met with the 9 Peat Marwick auditors, was that the most current 10 financial statement that had been audited? 11 A. Yes, it was. 12 Q. Now, the examination team was present 13 during the early part of 1988 at United Savings 14 Association of Texas; is that true? 15 A. Right. 16 Q. Was the examination team ever given any 17 materials related to Peat Marwick's audit, if it 18 took place, of the financial statements of United 19 Savings Association of Texas for the year ended 20 December 31st, 1987? 21 A. No, we were not. 22 Q. So, this was the most current 17307 1 information you had from Peat Marwick; is that 2 correct? 3 A. Right. 4 MR. VEIS: Your Honor, I move the 5 admission of A14094. 6 MS. CLARK: No objection. 7 THE COURT: Received. 8 Q. (BY MR. VEIS) I would like to direct 9 your attention, Ms. Carlton, to Page OW181042. 10 Well, no. Let's look at 41 first. 11 At the top of the page next to the 12 Peat Marwick letterhead, there's some initials and 13 a date. 14 Do you see those? 15 A. Yes. 16 Q. Whose initials? 17 A. My initials. 18 Q. What's the date? 19 A. November 24th, '87. 20 Q. So, is that the date that you received 21 or reviewed this document? 22 A. It would have been either the review or 17308 1 receipt date. 2 Q. And the letter itself is dated 3 February 6, 1987? 4 A. Correct. 5 Q. Now, it says in here on the second page 6 at the top, "Nothing of significance came to our 7 attention except those items in Exhibit 1 which we 8 believe to be weaknesses in internal accounting 9 control." 10 Do you see that? 11 A. Yes. 12 Q. Now, did you look at Exhibit 1 to see 13 what they were talking about? 14 A. Yes, we did. 15 Q. Let me direct your attention to Page 3 16 of the exhibit. 17 Do you see at the bottom there's a 18 heading "trading versus investment accounting for 19 corporate debt and mortgage-backed securities"? 20 A. Right. 21 Q. All right. Let me read that paragraph 22 to you. "During 1986, all investments in 17309 1 corporate debt and mortgage-backed securities 2 (MBS) were accounted for on an investment basis. 3 We were informed that the association is to 4 establish accounts for the purpose of accounting 5 for both investment and trading activities and 6 that a standard policy is being established 7 relating to corporate debt securities and MBS 8 accounted for under the investment accounting 9 treatment to document why trades of such 10 securities are made with an indication of why such 11 trades are consistent with the investment 12 treatment. We recommended implementation of this 13 policy be closely monitored to ensure compliance 14 with management's intent." 15 Do you see that? 16 A. Yes. 17 Q. Now, was that presented to you by 18 Peat Marwick as their understanding of the 19 accounting treatment accorded United Savings 20 Association of Texas' securities of corporate debt 21 and mortgage-backed securities in 1986? 22 MS. CLARK: Objection, Your Honor. 17310 1 Is it in the record that this document 2 was written for Ms. Carlton? 3 MR. VEIS: She met with Peat Marwick, 4 she has said, with respect to this document. 5 MS. CLARK: So, maybe we could clarify 6 how this document came into her possession, 7 Your Honor. 8 Q. (BY MR. VEIS) Was this document 9 provided by Peat Marwick? 10 A. This document was requested and 11 provided by Peat as to the deficiencies they had 12 noted during their audit and the findings that 13 they had presented to management, along with 14 management's response for correcting those items. 15 Q. And was this as what was represented as 16 the manner in which the association was accounting 17 for its securities, corporate debt, and 18 mortgage-backed securities in 1986? 19 MS. CLARK: Your Honor, could we have 20 Mr. Veis try to ask some non-leading questions? 21 We haven't had any answers other than "right" for 22 the last 15 minutes. 17311 1 MR. EISENHART: Your Honor, this is one 2 paragraph taken out of a Peat Marwick management 3 letter to management. I don't know that there's 4 been any representation by anyone that this was 5 supposed to be a comprehensive overview of the 6 accounting treatment of the investment securities. 7 He's asking if it was represented. Represented by 8 whom? Under what circumstances? 9 Really, the question is just way overly 10 broad, way leading, and it's just going to confuse 11 the record, not help it. 12 THE COURT: All right. Restate your 13 question, please. 14 Q. (BY MR. VEIS) What did the 15 Peat Marwick accountants tell you about this 16 paragraph during the meeting? 17 A. They presented this report and stated 18 that what we find in the report is the exceptions 19 that they noted in the areas that are in the 20 different captions here. Along with that was what 21 management responded back to them as to what they 22 would do in an effort to correct these 17312 1 deficiencies in the different areas. 2 Q. And the paragraph I just read to you 3 was represented as Peat's findings with respect to 4 investments in 1986? 5 MS. CLARK: Your Honor, this continued 6 use of leading questions is totally inappropriate. 7 Ms. Carlton can tell what she knows about the 8 matters at issue in this case without having 9 counsel formulate the answers he wants to get by 10 the form of his question. 11 THE COURT: All right. Restate it. 12 Q. (BY MR. VEIS) I believe you just 13 testified that Peat indicated that the letter 14 contained their findings with respect to the -- 15 the areas dealt with in the letter; is that 16 correct? 17 A. Yes. 18 Q. Okay. And then do you take it from 19 that that this was their finding with respect to 20 trading versus investment? 21 MR. VEIS: If that's leading, I'm 22 sorry. 17313 1 Q. (BY MR. VEIS) What was their finding 2 with respect to trading versus investment? Where 3 is it set forth in the letter? 4 A. It's set forth here on Page 3. 5 Q. What was management's response? 6 A. Management responded by stating that a 7 separate account was established in 1987 which is 8 used to segregate and record MBS trading 9 activities and trading transactions along with 10 investment transactions, and they discussed that 11 they were approved weekly by the investment 12 committee. 13 Q. Going forward, what else was 14 management's response? 15 MR. EISENHART: Your Honor, we don't 16 even know that any of this material was discussed 17 at the meeting. If all he's going to have 18 Ms. Carlton do is sit here and read the 19 Peat Marwick letter, this isn't producing any 20 useful evidence. 21 We had the Peat Marwick people on the 22 stand. We probably had the people who wrote this 17314 1 letter on the stand. If we want to know what 2 Peat Marwick was saying in this letter or what 3 they meant by it, there's a far better way to do 4 it than to have Ms. Carlton sit here and read the 5 letter. 6 MR. VEIS: I think the critical issue 7 here is what Ms. Carlton understood was 8 Peat Marwick's position. That's what I'm trying 9 to establish. 10 MR. EISENHART: I have no objection to 11 that, Your Honor. If there was some discussion of 12 this related at the meeting, I would be pleased to 13 have Ms. Carlton relate it. 14 THE COURT: Ask her that, then. 15 Q. (BY MR. VEIS) Does the next page 16 further state the position which was related to 17 you by Peat Marwick at that meeting? 18 MS. CLARK: Your Honor, we object. 19 Mr. Veis has been instructed to allow the witness 20 to tell what she knows without a leading question, 21 and I think you ought to enforce that. 22 THE COURT: All right. Was this 17315 1 discussed at the meeting you're talking about? 2 THE WITNESS: Yes. They had discussed, 3 in general, the activity of the investment 4 securities; and we were informed that, at that 5 time, they had no trading activity. 6 They went on to state that what we were 7 finding here were, indeed, the exceptions noted in 8 the area of the different investments and that 9 management was, in some cases, correcting and, in 10 other cases, providing -- in the process of 11 correcting the deficiencies that they had noted in 12 their report. 13 Q. (BY MR. VEIS) Did you have any 14 contrary understanding from Peat Marwick? 15 A. No. 16 Q. Was it your understanding from 17 Peat Marwick that -- what was your understanding 18 with respect to the trading versus investment 19 accounting of mortgage-backed securities from 20 Peat Marwick? 21 A. It is my understanding that the 22 institution was not trading, that the institution 17316 1 was holding its portfolio for investment. 2 Q. And that was discussed at the meeting 3 with Peat Marwick? 4 A. Yes, it was. 5 Q. And is there anything in the letter 6 that would indicate to you anything to the 7 contrary? 8 A. No, there's not. 9 MR. VEIS: I would like now to show 10 Ms. Carlton documents previously admitted at 11 Tab 479. 12 THE COURT: Do you have an exhibit 13 number? 14 MR. VEIS: Yes. It's Exhibit T8034. 15 I'm sorry. I think it's -- we have the wrong 16 number here. It's T8039. 17 THE COURT: What is the exhibit number? 18 MR. VEIS: I believe it's T8039. It's 19 in under A1141, trial exhibit, 99. 20 MS. CLARK: Is that Tab 99? 21 MR. VEIS: Tab 99. 22 Q. (BY MR. VEIS) Do you see that 17317 1 document, Ms. Carlton? 2 A. Yes, I do. 3 Q. Those were the minutes of the board of 4 directors meeting of February 11, 1988? 5 A. Right. 6 Q. Directing your attention to the last 7 sentence of the first paragraph, it indicates that 8 you were present at that meeting. 9 Do you see that? 10 A. Yes. 11 Q. And were you present at that meeting? 12 A. Yes. 13 Q. Do you have a recollection of that? 14 A. It states here that I was at that 15 meeting. 16 Q. Do you have a recollection of attending 17 the USAT board meeting? 18 A. Yes, I do. 19 Q. Do you have a recollection of a 20 discussion of employment agreements at board 21 meetings you attended? 22 A. No, I do not. 17318 1 Q. You do not? 2 Well, let me direct your attention to 3 Page 27 and ask you to just take a moment to 4 review Page 27 carrying over to Page 28 where 5 there's a discussion of a resolution regarding 6 employment contracts. 7 A. (Witness reviews the document.) Okay. 8 Q. Does that refresh your recollection at 9 all with respect to a meeting at which employment 10 contracts were discussed? 11 A. I don't recall being at a meeting in 12 which they discussed the contracts. 13 Q. Now, this refers to certain employment 14 contracts between the company, which I take to be 15 United Savings Association of Texas, and certain 16 executive officers. 17 Do you know whether the examination 18 team ever received copies of the contracts 19 referred to in these minutes? 20 A. No, we did not. 21 Q. Well, let me show you a document that's 22 been marked A14086. 17319 1 What is A14086? 2 A. It is a review of the salary and 3 compensation of the management of the institution, 4 and attached to it is a review of the employment 5 contracts for the officers of the institution that 6 were with UFG. 7 Q. First, let me ask you a question. Are 8 employment contracts an area that are generally 9 reviewed in an examination? 10 A. We review them sometimes. 11 Q. Is salary and compensation an issue 12 that's reviewed during an examination? 13 A. Yes, all the time. 14 Q. Is that requested in the PERK package? 15 A. Yes. Salary information and bonus 16 remuneration for officers and directors is part of 17 the PERK request. 18 Q. Now, did there come a time when the 19 examination team made a special request for 20 employment contracts between United Savings 21 Association of Texas and its executive officers? 22 A. Yes, we did. 17320 1 Q. Do you recall approximately when that 2 was? 3 A. It was sometime, I think, in January. 4 Q. Did the examination team receive those 5 contracts at that point? 6 A. We received contracts with UFG only. 7 Q. Only? 8 A. Only. 9 Q. Did the examination team make a second 10 request for contracts between the association and 11 executive officers? 12 A. Yes, we did. 13 Q. And did the examination team receive 14 contracts at that point? 15 A. We were told that none existed, that we 16 had the contracts that existed at that time. 17 Q. Well, let's go, then, and look at 18 A14086. 19 Now, this is -- it's got two pages. 20 There's a narrative and a table behind it? 21 A. Yes, it is. 22 Q. Could you please explain the narrative 17321 1 section? 2 A. The narrative section is a summary of 3 where we narratively commented on what we had 4 found within the employment contracts themselves. 5 MR. VEIS: Your Honor, I offer A14086. 6 MR. BLANKENSTEIN: Your Honor, just a 7 point of clarification. How many pages is 8 Exhibit A14086? Did you say two pages? 9 MR. VEIS: No. It's six pages. 10 MR. BLANKENSTEIN: I'm sorry. I 11 thought you said there were two pages. 12 MR. VEIS: No. 13 MS. CLARK: Your Honor, no objection. 14 THE COURT: Received. 15 Q. (BY MR. VEIS) Now, please explain the 16 narrative. I believe Mr. Blankenstein's question 17 interrupted your answer. 18 Would you please explain what this is? 19 A. The top sheet is a summary of the 20 findings that we found that you will find in the 21 schedule that -- in the back of the summary 22 schedule in which we did a spread of the 17322 1 information providing the term, the compensation 2 pay, the length of employment, and the terms as 3 far as date of origination of these contracts. We 4 took this information and compared it to the 5 guidelines for the review of employment contracts 6 and made noted comments in accordance with those 7 guidelines. 8 Q. Now, I would like to direct your 9 attention to the second page, which is OW128377. 10 Do you see that? 11 A. Yes. 12 Q. Now, under the column headed "company," 13 it indicates which company the employment 14 contracts were with; is that correct? 15 A. Right. 16 Q. Now, are there any there with USAT? 17 A. No. 18 Q. Well, perhaps -- if you would look at 19 Eugene Stodart, please. 20 A. Okay. (Witness reviewed the document.) 21 His was a letter. 22 Q. His was a letter. Okay. 17323 1 So, by that, do you mean it wasn't a -- 2 A. It wasn't the formal contract as the 3 other individuals had. 4 Q. But it was with USAT? 5 A. It was with USAT. 6 Q. Now, you're talking about formal 7 contracts. Were the others formal contracts? 8 A. They were legal drafted documents that 9 said they were agreements versus with -- if it was 10 not provided -- like Sandy Laurenson, hers was not 11 an agreement. It was a letter of employment that 12 set out terms for the tenure and compensation. 13 Q. Now, other than the letters you 14 discussed, were all the agreements with United 15 Financial Group? 16 A. Right. We designated those that were. 17 Q. Now, did you compare the salary levels 18 of these officers with others in the -- with what 19 you believed to be comparable institutions? 20 A. Yes, we did. 21 Q. Ms. Carlton, let me show you a document 22 dated -- that's been marked A14087. 17324 1 Is A14087 the comparison that you made? 2 A. Yes, it is. 3 Q. Is that part of the work papers of the 4 examination? 5 A. Yes, it is. 6 MR. VEIS: Your Honor, I move the 7 admission of A14087. 8 MS. CLARK: No objection. 9 THE COURT: Received. 10 Q. (BY MR. VEIS) Now, Ms. Carlton, what 11 did you conclude regarding the salaries involved 12 in the contracts that you reviewed? 13 A. We concluded that of the four 14 comparable Houston associations, only one had 15 higher salaries at the senior VP level than those 16 at United Savings. 17 Q. Now, did -- did the Federal Home Loan 18 Bank of Dallas conduct examinations of holding 19 companies in 1987? 20 A. No, we did not. 21 Q. Was it -- the examination limited to an 22 examination of the association itself? 17325 1 A. Yes, it was. 2 Q. Would a contract with the holding 3 company have any financial impact on the 4 association? 5 A. No, it would not. 6 Q. Would it have any effect on your 7 examination conclusions? 8 A. We would note it for the record; but 9 due to the fact that the holding company was 10 liable for these payments, it could not and would 11 not have an adverse impact on the institution. 12 Q. Now, you indicated you had not gotten 13 any contracts with United Savings Association of 14 Texas during the examination. Right? 15 A. That's correct. 16 Q. Now, let me direct your attention back 17 to Exhibit A14073, which is the report of 18 examination. Now, on OW077120, which, I guess, is 19 a cover sheet of some kind, is that -- 20 A. Yes, it is. 21 Q. Does that indicate the date that the 22 examination was concluded? 17326 1 A. Yes, it does. 2 Q. And is the examination based upon 3 information you had received through that date? 4 A. Yes, it is. 5 Q. Now, I would like to ask you to look at 6 Page 5 of the examination report, which is 7 OW077128, I believe. 8 Do you see that? 9 A. Yes. 10 Q. I would like to direct your attention 11 to the section titled "effectiveness of 12 management." 13 A. Okay. 14 Q. It says in the third paragraph, 15 "Chairman Gross also stated that USAT currently 16 has a sufficient and qualified staff, save and 17 except for a chief executive officer. He further 18 stated that USAT has retained the services of 19 Hewitt & Company to evaluates its employees' and 20 officers' compensation package, as well as to 21 provide assistance in the selection of an 22 individual to fill the chief executive officer's 17327 1 position." 2 Do you see that? 3 A. Yes. 4 Q. Can you explain how you came by that 5 information? 6 A. After we had criticized management for 7 their compensation and bonuses being excessive 8 based on the condition of the institution, the 9 institution agreed themselves to go out and 10 contract with a third party in order to come in 11 and do an analysis in which they would present to 12 OTS, Federal Home Loan Bank, a copy of that study 13 once it was completed that would provide 14 information to justify their salaries and bonuses. 15 Q. That was the information you had as of 16 May 20th, 1988, correct? 17 A. That's correct. 18 Q. And you hadn't reviewed any United 19 Savings Association of Texas contracts except the 20 letters you've mentioned in connection with 21 Exhibit A14086? 22 A. That's correct. 17328 1 MR. VEIS: May I have a moment, 2 Your Honor? 3 THE COURT: Yes. 4 5 (Discussion held off the record.) 6 7 MR. VEIS: Your Honor, I have no 8 further questions. 9 THE COURT: Do you want to cross before 10 lunch or after? 11 MS. CLARK: Your Honor, I think it 12 would be better to take the lunch break and start 13 after lunch. 14 THE COURT: We'll adjourn until 1:30. 15 16 (Whereupon, a lunch break was taken 17 from 11:44 a.m. to 1:35 p.m.) 18 19 THE COURT: Be seated, please. 20 MR. GUIDO: Your Honor, Mr. Nickens and 21 I have a preliminary matter, and I gather that -- 22 THE COURT: All right. We'll be on the 17329 1 record. 2 MR. GUIDO: The preliminary matter, 3 Your Honor, deals with the scheduling. The next 4 witness is scheduled to come up is Mr. Berner, one 5 of the respondents. He has some scheduling 6 problems. He's got a closing, a securities 7 closing, that he has to work on. And we think 8 that this cross-examination will probably go well 9 into tomorrow and maybe beyond. 10 What we would like to do is have the 11 ability to release Mr. Berner because of his 12 scheduling problem. And, in fact, we're talking 13 about possibly switching another witness for him 14 starting on Monday if that's acceptable to Your 15 Honor. But there is a possibility that we may end 16 up finishing early and have some extra time 17 tomorrow that we'd be unable to fill and we wanted 18 to get some direction from you before we let 19 Mr. Berner know that we've agreed jointly to 20 release him from being available tomorrow before 21 we proceed. 22 MR. NICKENS: Your Honor, that's 17330 1 substantially correct. The -- it is our belief 2 that the cross-examination will go well into 3 tomorrow and probably slightly beyond. And we'd 4 like permission to go ahead and release Mr. Berner 5 rather than having him hang around subject to a 6 call that is not likely to come, given his 7 schedule. 8 Now, he's available. He will be here 9 if you tell us we need him and make other 10 arrangements. It's just we'd like to accommodate 11 him if possible, given the fact that we think it's 12 not very likely that it will happen. 13 THE COURT: All right. That sounds 14 reasonable. You can release him. 15 MR. GUIDO: Thank you, Your Honor. 16 MR. NICKENS: Thank you, Your Honor. 17 MR. VEIS: Your Honor, another 18 preliminary matter. Your Honor will recall that 19 OTS had been directed to supply a paper copy of 20 the S memorandum with all its attachments to the 21 respondents, I believe, on Tuesday to supplement 22 the imaged copy that they had in their possession. 17331 1 I have delivered that copy to Ms. Clark 2 this afternoon. I just wanted to get that on the 3 record that we've complied with Your Honor's 4 order. 5 MS. CLARK: Your Honor, we'll try to 6 open the boxes and look at them over the weekend 7 and report back to the Court on Monday as to 8 whether they appear to be the S memo exhibits. 9 THE COURT: Okay. All right. The 10 direct is complete. And Ms. Clark, you're going 11 to cross-examine? 12 MS. CLARK: Yes. Thank you, Your 13 Honor. 14 THE COURT: Proceed. 15 16 EXAMINATION 17 18 Q. (BY MS. CLARK) Ms. Carlton, we've 19 ended up hearing a great deal about the books and 20 records problems that you encountered during the 21 1986 examination of USAT, and I would like to be 22 sure that the Court is very clear on what the 17332 1 books and records problems were that you found and 2 where you would find the record of your findings 3 in the actual exam report. 4 Now, as I recall, one of the principal 5 problems that you found was that certain property 6 types had been coded incorrectly; is that correct? 7 A. That's correct. 8 Q. And could you tell the Court what that 9 really involved? 10 A. What that involved is as you tie back 11 your subsidiary ledgers which is a trial balance, 12 say, of construction lending. Once you go through 13 the construction lending, you would find the 14 institute -- I'll start over. The institutions 15 provide a coding list numerically, by numbers, 16 that tie out subledgers. Say, 7, for example. 17 May be construction lending. 8 may be consumer 18 lending. 10 may be mortgage lending. From that, 19 we select our sample of loans to pull. 20 Once we pull our sample of what we 21 thought were, say, construction lending at a code 22 of 8, we found consumer lending within that 17333 1 portfolio. Therefore, that subledger would be 2 ruled inaccurately reflecting the total dollar 3 amount of consumer loans that would have been tied 4 to the TFR report which was reported to us. 5 Q. Would there be a correspondingly -- a 6 corresponding mistake on the other code? In other 7 words, if you've got too many construction loans 8 then, would you have too few of the other kind? 9 Would the mistakes balance each other 10 out in the aggregate? 11 A. No, they did not. You really were -- 12 you -- the only way you -- as we go to pull the 13 next sample, would you find additional areas. 14 There is no reconciliation of the subledgers to 15 the general ledgers at all. 16 So, we came up with what was reasonable 17 and told, provided by the institution, since there 18 was no way that we could verify that and the 19 institution could not verify it. Because of the 20 way the data generated into the general ledger, we 21 used the best numbers that the institution had 22 provided and did our analysis based on those 17334 1 numbers. 2 Q. Were you working with a 3 computer-generated subledger? 4 A. It was -- you would have -- yes. There 5 were different computer-generated documents. 6 Q. So, the coding that you're talking 7 about was the coding in the computer that carried 8 the data in the various subledger accounts. 9 Is that the mistake -- 10 A. Those subledgers feed to the trial 11 balance which feed to the general ledger, which is 12 your basic database for the institution that ties 13 out to what the actual assets were. 14 If you have assets that -- say, if you 15 have a coding problem where you have an asset 16 that's not an asset but really a liability, then 17 you don't know what your total assets are. And 18 that was the situation we were dealing with. 19 Q. Forgive me. I'm just trying to 20 understand. When you use the term "coding," are 21 we talking about a computer code that is 22 information that was coded in the computer 17335 1 incorrectly? 2 Is that what the problem was you found? 3 A. No. You're talking about asset type, 4 meaning departments -- your major lending, your 5 commercial lending, your consumer lending, your 6 major GL accounts that would be coded by a number 7 that feeds into your trial balance, in turn, feeds 8 into the thrift report. Those numbers were not 9 correct. 10 Q. And each asset -- just to take the 11 asset account, each asset should be coded to the 12 proper type of asset. If it's a consumer loan, it 13 should be coded as a consumer loan. If it's a 14 construction loan, it would have a different 15 number. It should be coded as a construction 16 loan, correct? 17 A. Correct. 18 Q. And what you found was sometimes you 19 would have a construction loan come up when you 20 push the key to get the consumer loans? 21 A. It wasn't the pushing of a key. 22 Q. It was on a physical ledger? 17336 1 A. You were provided a physical database. 2 Q. Okay. 3 A. And said, "These are our construction 4 loans." And when you pulled from that database, 5 you would find other types of lending within that 6 database. 7 Q. So, it's the hard copy, the printout, 8 that you were working with when you were reviewing 9 these accounts to try to make them tie with the 10 TFR? 11 A. Correct. We did not have access to 12 that physical inputting -- database by inputting 13 into the computer, no. 14 Q. And so, for every consumer loan that 15 was improperly coded as a construction loan, you'd 16 have that much too little showing for your 17 consumer loans and that much too much showing for 18 your construction loans when you're talking about 19 dollar amounts. Right? 20 A. It could vary back and forth as far as 21 what the situation was. 22 Q. Now, do you recall whether this was a 17337 1 function that was carried out within the 2 accounting department at USAT? 3 A. What do you mean? 4 Q. The coding of the property types that 5 you found to be inaccurate. 6 A. It varied. Part of it was a part of 7 the EDP system in which they were gathering data 8 from the two banks. You had Houston First on the 9 consolidation, which they were doing a conversion. 10 Some of the data was just tainted from that 11 conversion, and they had not identified and 12 cleaned up. The literal general ledger databases 13 was part of the problem. 14 And another problem is that any 15 individual, even a teller, had access that could 16 go in and post a journal entry that would actually 17 hit their general ledger. So, it was not isolated 18 into one incident. 19 Q. You mentioned two banks. Could you 20 describe what you were referring to there? 21 A. Bank United was a consolidation of 22 United Savings and Houston First, an additional 17338 1 thrift that they had acquired a couple years 2 earlier than that. 3 Q. As an examiner, you had occasion to 4 examine Houston First prior to the merger, did you 5 not? 6 A. I had been on the Houston First 7 examination, yes. 8 Q. And what did you find about the books 9 and records of Houston First? 10 A. It was an institution with financial 11 difficulties. I do not recall the actual books 12 and records. I did not work on that area. 13 Q. But some of the coding problems that 14 you encountered you found were the result of 15 trying to merge two different general ledgers and 16 subledgers together into one upon the merger of 17 those two different thrift institutions; is that 18 correct? 19 A. Yes. 20 Q. Let's go to another one, the tying of 21 the subledger to the general ledger. 22 Can you just give us a sort of layman's 17339 1 explanation of what the problem was there? 2 A. The -- in institutions, you have your 3 general ledger which is the key accounting account 4 ledger and with that -- that handled your 5 traditional GL accounts. And tied to that, you 6 had broken down into additional subledgers, 7 meaning that you may have total mortgages on your 8 general ledger, and those mortgages can be broken 9 down by one-to-four lending, FHA lending, Ginnie 10 Mae lending. You could have different types of -- 11 types within that one-to-four portfolio that would 12 feed into the general ledger key account. 13 What you found was that for each time 14 we asked for a subledger, you came up with a 15 different balance. And none of those balances 16 would then tie back to that general ledger. 17 Q. And again, was this information that 18 was being printed out from the computer and 19 provided to you in hard copy that you were working 20 with? 21 A. Yes, it was. 22 Q. I think the other major area that 17340 1 you've talked about is GAAP to RAP reconciliation. 2 Can you again give us a layman's 3 explanation of what problem you found there? 4 A. In trying to reconcile the GAAP to RAP 5 reconciliation, the institution had about three to 6 four documents that you would have to take and 7 take those codings from one document that -- on 8 the GAAP side, cross it with an intermediate 9 report, and from that report, sum up the variances 10 of those two documents and then try to tie it to a 11 third document. And if you came up with variances 12 between those accounts, then you would have to go 13 back to that individual that you were obtaining 14 this information from, note your differences, and 15 try to get an explanation as to why all of these 16 documents did not reconcile back to each other. 17 Q. What was the difference -- or I guess I 18 should ask it differently. 19 What are the differences between GAAP 20 and RAP? 21 A. The difference between GAAP and RAP is 22 you have some contra accounts that are established 17341 1 on the GAAP side, one being goodwill, which is not 2 typically on the books of your usual GAAP side of 3 the bank. 4 From a regulatory standpoint, you had 5 apprised equity capital that you saw in one of the 6 documents. You would not find that on your GAAP 7 books. You had other contra contracts that would 8 be offsetting receivable accounts to, say, an 9 asset account that would be placed typically where 10 it should be an asset. You would not have it 11 being reported on the liability side of the 12 balance sheet. And you had reporting guidelines 13 and a book that went through and gave you the 14 description based on -- if a number is negative on 15 the asset side, that number would then be placed 16 on your liability side of the book. Vice versa, 17 if you've got a liability number that could be a 18 debit, that number would then be placed on the 19 asset side as a contra account. And it's a 20 laundry list of certain items that differ between 21 GAAP and RAP accounting. 22 Q. And what did you find at USAT was the 17342 1 main problem? What seemed to be the problem that 2 was making it difficult to reconcile these 3 numbers? 4 A. You had -- first of all, you didn't 5 have individuals that were knowledgeable as to the 6 gathering and compiling of the numbers. And for 7 each database or data document that the computer 8 could generate, you did not have anyone that could 9 explain the differences that that computer data 10 was providing to you. You basically just had a 11 conglomerate of documents that the computer could 12 generate but you could get no explanation and no 13 trails and reconcile that. 14 Q. Did you try to ask questions? 15 A. We had meetings with five and six 16 individuals. We had meeting on top of meeting 17 between examination staff and the institution, and 18 you didn't get anywhere. 19 In addition to that, when we pulled 20 some of the loans, they didn't even have the files 21 themselves. You had missing files in which you 22 couldn't even verify data. 17343 1 Q. Now, I'd like to ask you if you could 2 look at -- I think it's A14020, please, which was 3 your 1986 exam report. I believe you'll find it 4 in front of you. It is now in the record at 5 Tab 1461. And point the Court to exactly where 6 the Court would look to find out what the problems 7 with the books and records were that you found as 8 a result of the 1986 exam. If you could just 9 point him to the page and the paragraph if he 10 wants to know exactly what the problems were and 11 what they were not. 12 A. It would take a combination of this 13 report and interim reports. 14 Q. Can we start with the final report, 15 please? 16 THE COURT: Would you give us that 17 exhibit number again, please? 18 MS. CLARK: Yes, Your Honor. it's 19 A14020. 20 THE COURT: And that was put in 21 yesterday? 22 MS. CLARK: I believe so, Your Honor. 17344 1 MS. CLARK: 2 A. It starts on the records, systems, and 3 controls under "management," bar code OW078172. 4 Q. (BY MS. CLARK) And does it continue 5 onto the next page, Ms. Carlton? 6 A. Yes, it does. It will go to B. 7 Q. So, the books and records problems that 8 you found are reported on Page 24 of your exam 9 report going over to the first part of Page 25. 10 It's section Roman numeral IIIA. 11 Now, you mentioned that this would not 12 reveal all of the books and records problems that 13 you found, correct? 14 A. That's correct. 15 Q. And that you would like to also point 16 us to something in the interim reports. So, let's 17 have you do that. 18 Tell us where in your Interim Report 19 No. 1 which is at A14016. That's the exhibit 20 number. It's in the record at Tab 1457. 21 MR. VEIS: I'm sorry, Your Honor. which 22 interim report? 17345 1 MS. CLARK: I am pointing her to the 2 interim report dated July 17, 1986, which is 3 Exhibit A14016. 4 A. In this report, books and records start 5 at No. 2, "Establishment and maintenance of books 6 and records," and it goes to "Financial report 7 analysis." 8 Q. (BY MS. CLARK) Now, why was this 9 information in Roman numeral II of Exhibit A14016 10 not reproduced in the final examination report? 11 A. Because once we have reported 12 information to Dallas, they do not require that we 13 duplicate that information because the interim 14 report is a record, our report of deficiencies. 15 And that information stands as is, although it is 16 an interim report. 17 Q. And that's -- that suffices for the 18 purpose of reporting to Dallas, correct? 19 A. To Dallas and to Washington, D.C. 20 Q. And what we're talking about are your 21 superiors in the thrift regulatory apparatus -- 22 that is, the Federal Home Loan Bank of Dallas and 17346 1 the Federal Home Loan Bank Board in 2 Washington D.C. 3 That's what you're referring to? 4 A. Yes, according to whatever period you 5 are talking about. 6 Q. So, that suffices for the purpose of 7 reporting to your superiors what the problems 8 were. It doesn't address the question of 9 reporting to the association what problems you 10 found, though, does it, since these interim 11 reports are not provided to the association, 12 correct? 13 A. Right. We have status meetings with 14 the institution to provide them information. 15 Q. Let's look at your other interim 16 report, September 16th, 1986. It's marked as 17 Exhibit A14017, and it's at Tab 1459. 18 A. Books and records is found on Page 3 of 19 this report, and it flows to the next page, 20 Page 4. 21 Q. And are the books and records problems 22 that are reported in this interim report the same 17347 1 kinds of problems that you've explained to the 2 Court this afternoon? 3 A. No. I was specific with you with 4 addressing coding and addressing the questions 5 that you asked me. 6 Q. What other books and record problems 7 are disclosed in this report to your superiors 8 within the regulatory apparatus? 9 A. In the interim report dated August 19, 10 1986, we address the restatement of quarterly 11 earnings on the mortgage-backed securities, the 12 reclassification of interest rate risk swap 13 expenses, the reclassification of money desk 14 clearing accounts, the recalculation of accrued 15 interest on loans. We address the fact of how 16 many times the institution had amended its 17 reports. We address the issue that the 18 institution had granted consumer loans secured by 19 first lien and had those listed as raw land for 20 purpose of shell homes. 21 Q. Is that a coding problem? 22 A. That is beyond a coding problem. 17348 1 Q. That's beyond a coding problem? 2 A. Yes. 3 Q. Could you tell us what that involved? 4 A. That means that based on the security 5 that supported those loans, that the institution 6 had incorrectly placed those loans into a 7 different category. Institutions were required to 8 have certain limitations in, say, land and 9 development loans. And if you were misstating 10 that, you could not determine by a monitoring, 11 other than an examination, that the institution 12 had exceeded things like investment in land. 13 So, you could have had limitation 14 violations based on a reporting issue like that. 15 Q. Any other problems that you see in this 16 interim report? 17 A. Other than it was included you had 111 18 REO files that could not be located at all in 19 which they had literally no documentation, no 20 note, no deed, no appraisal, no nothing. 21 Q. Now, how does this information that 22 you're sending to your superiors in Washington get 17349 1 communicated to the association? Do you -- let me 2 just ask more specifically: Is this the subject 3 of an exception, the type of communication that 4 you talked about, I believe, the day before 5 yesterday, an exception sheet? 6 Is that how you communicate these 7 problems if they are serious enough to communicate 8 to the management of the association? 9 A. Once we commence an examination, we go 10 on and we request data and we pull our sample. If 11 we -- for some reason that data is not received, 12 we will go back and request data a second time or 13 however many times we need to get the information. 14 If, after a certain length of time we 15 feel is reasonable, we have not received that 16 information, we then prepare exceptions. Those 17 exceptions provide the institution an opportunity 18 to either clarify that they do not have the 19 information, provide additional information, or 20 let us know where that information is located -- 21 and it could be we overlooked it, or if they have 22 more than one file in some instances -- where we 17350 1 can obtain that information. 2 Q. Apart from the question of trying to 3 get the information that you're asking for, trying 4 to prompt the association to respond to an 5 information request, I'm really asking you: If 6 you find a problem and you think the problem is 7 serious enough to report to Dallas and Washington, 8 how is it that you communicated that problem to 9 the association so they can respond, take 10 corrective action, or whatever? 11 A. We have status meeting with management. 12 Q. And do you document those meetings in 13 any way whatsoever in your work papers? 14 A. Some of the meetings are documented. 15 Not all of them were. 16 Q. So, there may be instances where you 17 find problems that are serious enough to report to 18 Washington where you would have no documentation 19 in your work paper whatsoever of your 20 communications with the association about those 21 problems? 22 A. It would be communication with the 17351 1 association. You may not have documentation of 2 such meeting. 3 Q. So, you have no record whatsoever of 4 having communicated these very serious problems to 5 the association unless you have put them in your 6 work papers. And you don't necessarily put them 7 in your work papers. 8 Is that your recollection of how you 9 operated? 10 A. No, it's not. 11 Q. Can you please explain how you did 12 operate in that regard? 13 A. We had status meetings with the 14 institution in which we disclosed major findings 15 of the examination. Some of those discussions 16 that we had with management are documented. Some 17 of those discussions are not documented. 18 Q. How do you decide which ones to 19 document? 20 A. It was determined based on time frame, 21 based on the situation that may exist at the time. 22 A good example, say, with the Couch situation, if 17352 1 we had to go into a meeting and didn't have time 2 to prepare an agenda or prepare a meeting, we went 3 into the meeting, we had a discussion, and there 4 was not a record. 5 Q. And there would be no record, no 6 written record, that could be reviewed to 7 determine what you had and hadn't informed the 8 association and what they had and had not 9 responded. 10 Is that your recollection? 11 A. There could be some situations in which 12 we had meetings, be they called them or we called 13 them, and you may not have a document that would 14 document those conversations. 15 Q. I think there's one final interim 16 report. I'd like you to just point out to the 17 judge where the books and records problems are 18 reported in this particular document. Oh, I'm 19 sorry. 20 MS. CLARK: The document number is 21 A14019, Tab 1460, Your Honor. 22 A. 14 -- 17353 1 Q. (BY MS. CLARK) 60, but I think we'll 2 get you another copy to look at. 3 A. (Witness reviews the document.) This 4 report does not address books and records in a 5 separate heading. 6 Q. Does it address books and records under 7 any other heading? 8 A. Any time you have a regulatory 9 violation, a question, a directive of reserves not 10 being reported, policies not being established, 11 those are books and records deficiencies. 12 Q. So, let me just ask you, Ms. Carlton: 13 If Judge Shipe would like to review what the books 14 and records problems are that you found to 15 determine whether they have anything to do with 16 the charges in this case, he would refer to the 17 four documents that we've talked about and to the 18 particular portions of those documents as the best 19 evidence of what those problems were, correct? 20 A. And we also have a violation page that 21 sets out violations themselves. 22 Q. Do you want to find that? And let's 17354 1 identify that for the judge, as well. 2 A. I think you'll find it in the -- I 3 think the '86 exam has such a page. Under the '87 4 exam, it is Appendix 26.1 and 26.2. 5 Q. Can you give us that exhibit number? 6 Is that A14073? 7 A. Yes, it is. 8 Q. And what is the -- 9 A. Bar code OW077253 and 77254. 10 Q. As I understand your testimony, 11 Ms. Carlton, you felt during the 1986 exam that 12 the problems that are reflected in these documents 13 and that you have explained to Judge Shipe 14 interfered with your ability to complete the 15 examination in a timely manner; is that correct? 16 A. Yes. 17 Q. You also talked a bit about how you 18 felt that management was very argumentative with 19 you and that management did not quickly agree to 20 make the adjustments that you felt were necessary 21 on their books. 22 Is that a fair summary of your 17355 1 testimony? 2 A. Yes. 3 Q. You found them argumentative? 4 A. We found them non-cooperative. 5 Q. Because they were arguing with you 6 rather than making the adjustments that you felt 7 were warranted in the books and records that you 8 examined? 9 A. The word "argumentative" is not a term 10 of mine. I would not use that term. 11 Q. You would use the term "cooperative," 12 correct? 13 A. Non-cooperative. 14 Q. And what you mean by that is they did 15 not make the changes that you suggested or that 16 you felt were necessary and, instead, argued that 17 those changes were not warranted. 18 Is that what you mean? 19 A. No. 20 Q. What did you mean? 21 A. I mean that the management of the 22 institution was slow to provide data in order to 17356 1 complete the analyses that we needed to complete. 2 It means that the management would delay providing 3 information in instances that we would have to 4 request that data several times. It also means 5 that management had a policy through the liaison 6 and the way in which we were requesting the data 7 that, in itself, delayed the process of obtaining 8 information. 9 Q. Now, you're not suggesting, are you, 10 that management was deliberately creating problems 11 in its books and records, deliberately failing to 12 fix the accounting problems that you identified in 13 order to keep you from finishing your examination 14 in a timely fashion. 15 You're not making that suggestion to 16 the Court, are you? 17 A. Those are your words. I would say that 18 management did not provide data. Management did 19 not correct deficiencies that were noted. 20 Management, in some cases, did not provide the 21 information that was requested. Because of that, 22 it delayed the examination process. 17357 1 Q. But I want to make it very clear, 2 Ms. Carlton. You're not suggesting to Judge Shipe 3 that you believe that these books and records 4 problems and the response to information requests 5 were deliberately designed to prevent you from 6 completing your exam and reaching your final 7 conclusions on net worth and other important 8 aspects of your examination? I want to make 9 absolutely clear whether or not that is your 10 testimony in this courtroom. 11 MR. VEIS: Your Honor, I object. 12 Ms. Clark is asking Ms. Carlton to speculate as to 13 management's motives. I don't believe it's a 14 proper questions. 15 MS. CLARK: Your Honor, I'm asking 16 Ms. Carlton to make clear whether or not she is 17 making an allegation that these books and records 18 problems were deliberately created so as to keep 19 her from completing the exam and reaching the 20 conclusion about net worth and other important 21 aspects of her examination. 22 Is she making that allegation or not? 17358 1 THE COURT: If she has an opinion on 2 that, we will hear it. 3 A. I can only attest to what happened. 4 And I can only attest that due to the process of 5 their behavior, it did cause a delay in the 6 examination. As far as what their intentions were 7 individually, I cannot address that. I can only 8 attest to the process that took place during both 9 exams and what it caused. 10 Q. (BY MS. CLARK) It would be a crazy 11 idea, wouldn't it, to believe that they were 12 creating these problems in their accounting system 13 in responding to your requests simply to delay 14 your examination results? 15 MR. VEIS: Your Honor, I don't believe 16 that Ms. Carlton has been qualified to give -- 17 THE COURT: All right. I'll sustain 18 it. 19 Q. (BY MS. CLARK) Let me ask you, 20 Ms. Carlton: Do you know who the defendants are 21 in this case? 22 A. Yes. 17359 1 Q. Who are they? 2 A. You have Charles Hurwitz, Jenard Gross, 3 Mr. Huebsch, and Munitz. I don't know all first 4 names, but a general list. 5 Q. Charles Hurwitz, Mr. Gross, and 6 Mr. Munitz. 7 Do you know any of the other names of 8 the defendants? 9 A. I say Huebsch. 10 Q. Mr. Huebsch is his name. 11 A. Huebsch. Yes. 12 Q. Do you know any of the others? 13 A. Those are the ones I can recall. 14 Q. Do you know that Mr. Crow is a 15 defendant? 16 A. Yes. I forgot about him. 17 Q. And Mr. Berner? 18 A. Yes. 19 Q. And last year when you were in 20 Washington preparing for your deposition, Mr. Veis 21 explained to you what this case is about and what 22 the charges are that they are bringing against 17360 1 these individuals, did he not? 2 A. I have been provided a copy of the 3 charges. 4 Q. And you've discussed them with 5 Mr. Veis; isn't that correct? 6 A. I don't recall -- I would say yes. 7 Q. So, you know that one of the claims 8 that the OTS is making against the respondents is 9 that they were hiding from the regulators the fact 10 that they were selling investment securities for 11 accounting gains. 12 You know that that's one of the charges 13 in this case? 14 A. Yes, I do. 15 Q. And do you know that the OTS's theory 16 is that the reason they were doing that was that 17 they wanted to create a false impression that 18 United was satisfying its net worth requirements. 19 You're familiar with that aspect of the 20 claims against the defendants in this case? 21 A. I don't know the exact wording. I know 22 it's in a summary similar to that. 17361 1 Q. And have you also talked with OTS 2 counsel about the fact that they are claiming that 3 by hiding what they were doing with securities 4 sales, the respondents were, in fact, able to hide 5 the net worth problems from the regulators and 6 avoid supervisory action? 7 Have you talked about that theory with 8 the OTS counsel that you've been meeting with? 9 A. I know that as part of the charges -- 10 not using the terminologies as you present them -- 11 that there is a summary of charges to that tune. 12 Q. Now, isn't that theory totally 13 inconsistent with what you saw at United while you 14 were there? 15 A. No, it's not. 16 Q. Let me ask you a few questions about 17 that, Ms. Carlton. 18 Isn't it true that shortly after you 19 arrived at United, management were fighting with 20 their auditors to actually try to avoid 21 recognizing over $35 million of gain on the sale 22 of securities? 17362 1 A. I don't know what management was doing 2 with the auditors. I know that you have the 3 newspaper article that was published that shows 4 that. 5 Q. Well, we know what we're talking -- 6 we're both talking about the same thing. Right? 7 You're talking about a newspaper article about an 8 incident where United had deferred recognizing 9 gains on the sale of securities -- in this case, 10 mortgage-backs -- and the auditors came in and 11 required that they go ahead and recognize those 12 gains in the amount of something over $35 million. 13 We're talking about the same incident, 14 aren't we? 15 A. That's the argument that was presented. 16 Q. And you knew that United's management 17 wanted to defer the gain and was forced to 18 recognize it by the auditors because management 19 explained that to you; isn't that correct? 20 A. We found out about the paper -- through 21 the newspaper. After the article was published in 22 the newspaper, we went to management and asked 17363 1 management if they would explain to us what this 2 means, is it true, can you provide us support and 3 data as to why this entry was made and why you're 4 restating your books? 5 Q. You remember the memos that you wrote 6 about that incident? I think Mr. Veis showed you 7 a couple of different documents. Let's look at 8 them again. A14017 was an interim report dated 9 August 19th, 1986. 10 A. What's the date again? 11 Q. August 19th, 1986. 12 A. Yes. 13 Q. And there was another document that he 14 discussed with you at the same time, which was 15 A14018, and it's a September 4, 1986 comment 16 document that you wrote. 17 Do you have that in front of you? 18 A. Is that a comment in the report? 19 Q. It's a handwritten memo from you to 20 Richard Ward dated 9/4, and it begins "Enclosed is 21 a comment." 22 Do you have the documents in front of 17364 1 you now? 2 A. Okay. So, you want 04017 and 04018? 3 Q. Yes. 4 A. Okay. 5 Q. Now, do you remember that Mr. Veis made 6 a point of getting you to testify that the 7 September 4th, 1986 handwritten document was 8 actually prepared before the August 19, 1986 memo 9 that is attached as the second part of A14017? Do 10 you remember how you and he went through that and 11 he had you explain why you thought -- or that you 12 thought that the document with the later date was 13 actually created earlier? 14 A. Yes. 15 Q. Now, do you remember that when we 16 talked about the restatement of earnings that is 17 described in these two documents in Washington 18 last year, you basically didn't remember it at 19 all? That is to say, you -- 20 A. I don't recall exactly everything in 21 your deposition. 22 Q. Well, would you disagree with me that a 17365 1 year ago, you did not remember what the 2 restatement was about at all? 3 A. I don't recall making that statement. 4 Q. Okay. Let me ask you to take a look at 5 your deposition. It's a deposition taken in May 6 of 1997, and I'd ask you to look at Pages 412 and 7 416. 8 A. Page 16? 9 Q. Starting on Page 413, if you would, and 10 read through Page 416. 11 A. (Witness reviews the document.) Is 12 that Page 412 through Page 418? 13 Q. If you'll start on Page 413, the bottom 14 of the left-hand column. 15 Have you found the place? 16 A. Yes. 17 Q. Why don't we just go through it 18 together? I'll direct your attention to Page 413. 19 I asked you the question, "Do you recall the 20 mortgage-backed securities adjustment that 21 occurred in 1986?" 22 Do you see that? 17366 1 A. (Witness reviews the document.) 2 Q. Let's see if I can help you. 3 MR. VEIS: Excuse me, Your Honor. I 4 wasn't made aware that Ms. Clark was going to 5 utilize Ms. Carlton's deposition, and I don't have 6 a copy. (Whereupon a copy of the document was 7 handed to Mr. Veis.) 8 Q. (BY MS. CLARK) Have you found the 9 place now? 10 MR. VEIS: What pages are these? 11 MS. CLARK: Page 413. 12 A. Yes. 13 Q. (BY MS. CLARK) Okay. Have you found 14 where I was reading? "Do you recall the 15 mortgage-backed securities adjustment that 16 occurred in 1986?" 17 Do you see that? 18 A. Right. 19 Q. And what was your answer? 20 A. "No." 21 Q. Okay. Go to Page 14. We are looking 22 at documentation concerning the same adjustment. 17367 1 In the middle of that Page 414, there is another 2 question. "The document describes events 3 occurring during 1986. Does this refresh your 4 recollection about what the MBS adjustment was 5 that is the subject of the collection of notes?" 6 And your answer was "No," correct? 7 A. Right. 8 Q. It did not refresh your recollection. 9 Going down to Page 415 after the part where it 10 says, "(BY MS. CLARK)," do you see I asked you the 11 question "You don't recall that USAT, during 1986, 12 had been turning over their MBS portfolio monthly 13 in an attempt to match the MBS maturities with the 14 maturities of the interest rate swaps associated 15 with the reverse repos that the MBSs were 16 collateralizing?" 17 And your answer was what? 18 A. "No." 19 Q. And I go on, and I say, "Okay. Well, 20 maybe we can find something else to refresh your 21 recollection. This is something that was clipped 22 together in the work paper that you signed." 17368 1 And I say, "So, are you confident that 2 you made sure that you understood what it was at 3 the time?" 4 And your answer was what? 5 A. "No." 6 Q. "Is there something significant about 7 this that should be slapping me by now? I don't 8 mean the word 'slapping,' but is there something 9 significant about this document that I should 10 recall that I don't?" 11 Does that refresh your recollection, 12 Ms. Carlton, that as of a year ago, you did not 13 have -- you really didn't have any recollection of 14 the mortgage-backed securities adjustment that 15 occurred in 1986 that's the subject of the two 16 documents that Mr. Veis examined you about 17 yesterday? 18 MR. VEIS: Your Honor, I'm going to 19 object to this line of questioning. There's 20 something that Ms. Clark has not made the Court 21 aware of, which is that Ms. Carlton had been given 22 no opportunity to review work papers prior to her 17369 1 deposition and Ms. Clark, despite an expressed 2 request from OTS counsel to notify us of what work 3 papers Ms. Clark -- or Ms. Carlton ought to review 4 prior to her deposition, refused to give us that 5 information. 6 What Ms. Clark is reading into the 7 record now is simply a series of questions where 8 she essentially put a document in front of 9 Ms. Carlton which she had not seen for, I suppose 10 at that point, roughly ten years and asked her 11 what she remembered about it. I think it gives an 12 entirely misleading impression of the state of 13 Ms. Carlton's knowledge then and today. 14 The fact of the matter is, as I brought 15 out in direct examination, Ms. Carlton had an 16 opportunity to review 30 boxes of work papers 17 prior to her testimony today. It's hardly 18 surprising that her testimony -- that her memory 19 was refreshed and perhaps far more comprehensive 20 than at the time when she reviewed nothing. 21 I think this is incredibly unfair to 22 the witness, and I object. 17370 1 MS. CLARK: I'm not sure what he's 2 unhappy about, Your Honor. I'd like just to have 3 her answer the question. Does that refresh her 4 recollection that she didn't remember this at the 5 time she was deposed? There is not an implication 6 about her one way or the other. 7 THE COURT: All right. I'll deny the 8 objection. You may answer it. 9 A. Based on the documents that you 10 presented me at the time, I said "no" because I 11 did not recall, and it still stands "no" at that 12 time. 13 Q. (BY MS. CLARK) Now it is that you 14 believe that these documents that Mr. Veis asked 15 you about, that the one that's dated later was 16 actually written first; is that correct? 17 A. That's correct. 18 Q. Is there something significant about 19 the order in which these two documents were 20 created that would cause you to remember all these 21 many years later which order they were created in? 22 A. Yes, there is. 17371 1 Q. And what's that? 2 A. In my review of the work papers, I know 3 how to go back and put in order the sequence of 4 events and the way that they were transmitted to 5 the Dallas supervisory agent by putting the work 6 papers in order in sequence in the way they were 7 transmitted and provided to Dallas, and I know the 8 process in which we processed that exam. 9 Q. Now, how did Mr. Veis know to ask you 10 that question during his examination of you? 11 A. Because I provided him with the process 12 at which an examination takes place and provided 13 him with the sequence of events that take place in 14 an examination from first submitting PERKs, scope 15 memorandums, how the request files worked. 16 Q. So, you and he talked about these two 17 documents and you explained to him that it was 18 your opinion that the one that was later dated 19 actually came first in preparation for your 20 testimony if this hearing; is that correct? 21 A. Correct. 22 Q. Now, are you sure that this is the 17372 1 whole story about how these documents were 2 created? 3 A. I don't understand your question. 4 Q. Well, have you explained to the judge 5 exactly how these documents were created to your 6 satisfaction? 7 A. I answered your question. 8 Q. In your testimony with Mr. Veis on 9 direct examination, are you satisfied that you 10 have provided the judge with the whole story about 11 how these two documents were created? 12 A. Yes. Based on the question that you 13 asked me, yes. 14 Q. I'm asking you about your examination 15 with Mr. Veis. I'm not asking you about the 16 questions I'm asking. 17 In the questions he asked and the 18 answers you provided, are you satisfied that you 19 provided the judge with the entire story of how 20 these two documents were created? 21 A. Yes. 22 Q. Well, let's look at a few more 17373 1 documents on that subject. I'd like to show you a 2 document which has been marked Exhibit A12071 and 3 ask you, Ms. Carlton, if you could identify this 4 document as a different version of the 5 August 19th, 1986 memo that Mr. Veis examined you 6 about. 7 A. The version that you will see the GF4 8 number in the corner is the work paper version of 9 that number. The version that you have as 10 Exhibit 14017 is a document that shows that -- in 11 which the field managers have signed their 12 signatures on that document. 13 Q. Can you simply identify this as another 14 version of the August 19th memorandum that 15 Mr. Veis asked you about? 16 A. I wouldn't say it was a separate 17 document. Within the work paper files, you have 18 various versions, draft copies of documents within 19 the work paper files. This document as presented 20 here was -- if you look in the corner, this 21 document comes out of a supervisory file. 22 Q. I'm not exactly sure what distinction 17374 1 you're trying to maintain, but let me try again to 2 get the document identified. 3 Is this a memorandum dated August 19th, 4 1986, on which you have written the term 5 "corrected copy" at the top and the general file 6 code "GF4" on the bottom right-hand corner which 7 came out of your examination work papers for the 8 1986 exam? 9 A. Correct. 10 MS. CLARK: I move its admission, Your 11 Honor. 12 MR. VEIS: No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MS. CLARK) Now, I would direct 15 your attention to the second section of the 16 memorandum entitled "investment securities" and 17 ask you if you could explain to the judge what you 18 said in this August 19th, 1986 interim examination 19 report concerning the restatement of the 20 mortgage-backed securities in the -- in 1986 that 21 we have been talking about? 22 A. Do you want me to read that whole 17375 1 section? 2 Q. Yes. Why don't you go ahead and read 3 it to yourself. 4 A. (Witness reviews the document.) Okay. 5 Q. Now, Ms. Carlton, explain to the judge 6 what it is that you reported on in this 7 August 19th, 1986 interim report concerning the 8 circumstances of the restatement of USAT's 9 earnings to take into account the recognition of 10 the $36 million of gains on mortgage-backed 11 securities? 12 MR. VEIS: Objection, Your Honor. It 13 mischaracterizes the document. And Ms. Carlton 14 just testified that the prior exhibit, A14017, is 15 the document that indicates it went to Mr. Ward. 16 The document A12071, she pointed out, does not 17 bear that indication. So, I think it's misleading 18 to ask a question based on the premise that A12071 19 reported anything to anyone. 20 THE COURT: Well, let's clarify that. 21 MS. CLARK: Your Honor, we will clarify 22 exactly what went to Mr. Ward and didn't. But for 17376 1 the moment, I would simply like her to explain 2 what this document reported regarding the 3 circumstances of the restatement of earnings to 4 reflect additional gains of -- or additional 5 income for $36 million of securities gains. 6 MR. VEIS: Object to the 7 characterization using the word "report." 8 THE COURT: Fine. What does it say? 9 A. This report states that USAT had 10 invested -- that accounting treatment of the 11 mortgage-backs were reported in error during 12 January to June and had been deferred in a total 13 of 36.5 million. 14 The second paragraph addresses a 15 discussion with examiners and independent auditors 16 in which United reversed the deferral and booked a 17 gain. And it states that United had said that 18 they wanted to book the gain at that time because 19 of their desire to increase/maintain high-yield. 20 And in the final paragraph, USAT had 21 invested 1.0 million in mortgage-backed securities 22 guaranteed by government agencies as of June 1986, 17377 1 and that represented 20 percent of total assets. 2 Q. (BY MS. CLARK) I think you may have 3 inadvertently misstated the middle paragraph. 4 Just to be clear on the record, let me read it and 5 see if I'm -- let you confirm that this is, 6 indeed, what you said in your memo. 7 You said, "Following discussions with 8 the examiners and the independent auditors, USAT 9 reversed the deferral and booked a gain. USAT did 10 not want to book a gain at the time of each sale 11 because of the desire to increase or maintain a 12 higher yield." 13 Is that what you said in this 14 August 19, 1986 document? 15 A. That's what's stated. 16 Q. That's what you said, correct? 17 A. That's what's stated. 18 Q. That's what you said in this document, 19 correct? 20 A. Yes. 21 Q. Now, that doesn't seem like the action 22 of a management team that was willing to go to the 17378 1 lengths of creating problems in their accounting 2 systems to prevent the examiners to confirm a net 3 worth deficiency, does it? Resisting the booking 4 of a gain and being directed to do so by their 5 examiners and auditors does not seem to be a 6 management that is willing to go to that length. 7 Would you agree with me? 8 A. No. 9 Q. You would or you would not? 10 A. I would not. 11 Q. You would not agree with that? 12 A. Right. 13 Q. You do not interpret your memo to 14 indicate that they were trying to defer the gain 15 rather than recognize it immediately? 16 A. You have a regulatory violation that 17 was demonstrated here, and the auditors and 18 examiners were addressing that their books should 19 reflect the proper reporting on those securities 20 that would eliminate this violation of regulation 21 571.16(a)(2). 22 Q. And that's the position that the 17379 1 examiners took. They felt that even though 2 management wanted to defer the gain, that it was 3 more important to comply with the regulation and 4 to go ahead and book the gain and recognize the 5 profit. 6 That was the position that you -- that 7 the examiners took, correct? 8 A. The institution should not violate 9 regulations, period. 10 Q. Let me ask you to look at Exhibit 11 A12204, please. 12 Ms. Carlton, do you recognize the file 13 designation in the upper right-hand corner of this 14 document where it says "File ICF"? 15 A. It's a designation that's not put on by 16 examiners. Other than that, I don't know who put 17 it on there. 18 Q. When you and Mr. Veis talked about the 19 interim report -- your interim report concerning 20 the accounting for the mortgage-backed securities 21 gain in 1986, did he not tell you about Mr. Ward's 22 testimony about this file designation on the 17380 1 document that I've just shown you? 2 A. No, he did not. 3 Q. Do you notice -- well -- 4 MS. CLARK: Let me move the admission 5 of this exhibit which came out of the examination 6 work papers for the 1986 exam as produced to us by 7 the OTS. 8 MR. VEIS: No objection, Your Honor. 9 THE COURT: Received. 10 Q. (BY MS. CLARK) Do you notice that the 11 file designation appears to look identical to the 12 file designation on the exhibit that's marked 13 A14017? 14 A. Yes. 15 Q. And again, Mr. Veis did not tell you 16 about Mr. Ward's testimony about the circumstances 17 of this document? 18 A. No, he did not. 19 Q. And did you discuss with Mr. Veis 20 whether or not you would be telling the judge 21 about this particular version of the August 19th, 22 '86 memorandum in your testimony in this case? 17381 1 A. No. 2 Q. Did you discuss with Mr. Veis whether 3 you would be testifying about the version that has 4 your handwritten note "corrected copy" on the top? 5 A. No. 6 Q. Let me show you another -- well, let's 7 just ask you to please compare -- I'm going to 8 call -- the first one I showed you with the 9 corrected copy, let's call that No. 1 just to keep 10 them straight, Version No. 1. The one with the 11 right-hand -- upper right-hand corner designation 12 "file ICF," let's call that No. 2. 13 Would you please compare Version No. 1 14 and Version No. 2, just the one paragraph we're 15 focusing on that says "investment securities," and 16 see whether the two documents appear to be the 17 same? 18 A. They appear to be the same. 19 Q. Let me show you Version No. 3, please. 20 It is Exhibit A12073. 21 MS. CLARK: This is an August 19th, 22 1986 interim examination report by Vivian Carlton 17382 1 produced by OTS out of the examination work papers 2 from the 1986 exam. I move its admission, Your 3 Honor. 4 MR. VEIS: No objection, Your Honor. 5 THE COURT: Received. 6 Q. (BY MS. CLARK) Can you compare again 7 those three short paragraphs under Roman numeral 8 II that we're talking about and see if you can 9 determine whether they appear to be the same on 10 Version 3 as they are on Version 1 and Version 2? 11 A. They are the same with the exception 12 that the printing is getting smaller. 13 Q. Yes. That's true. Now, do you see 14 that someone has written in the left-hand margin, 15 in quotes, "write a comment"? 16 Do you see that? 17 A. Yes, I see -- yes. 18 Q. Now, do you recognize that handwriting? 19 A. I can't read it. I see some -- if you 20 have a larger version, maybe I can -- 21 Q. You're right. I should have brought my 22 magnifying glass today, and I did not. But it 17383 1 does say "write a comment." 2 Let me just show you -- let's see. 3 Let's look at one more. We'll call this Version 4 No. 4. It's Exhibit A2205. I'm sorry. A12205. 5 Ms. Carlton, take a moment and review 6 this document and see if you can identify this 7 document as a document that you have seen before. 8 A. It is a document I have seen before. 9 Q. Okay. And turn, if you would, to Page 10 OW158937. And do you see that that's yet another 11 version of the August 19th, 1986 memorandum that 12 you prepared, the interim examination report 13 document? 14 A. What's that date again? 15 Q. The numbers ending 937. 16 A. (Witness reviews the document.) Right. 17 Q. Now, did you see this document in the 18 course of reviewing work papers in the course of 19 preparing for your trial testimony? 20 A. I saw a stack of comments. Within our 21 work papers, you will have stacks of comments, 22 several different versions of it. And you will 17384 1 also find comments in different parts of the work 2 paper. 3 MS. CLARK: Your Honor, I move the 4 admission of Exhibit A12205, a document that came 5 out of the examination work papers produced by 6 OTS. 7 MR. VEIS: No objection, Your Honor. 8 THE COURT: Received. 9 Q. (BY MS. CLARK) Now, Ms. Carlton, do 10 you see that what we've called -- well, Exhibit 11 A12073 has the term "write a comment" next to the 12 section on investment securities. 13 Does that appear to you to be the 14 source of the comment that you prepared, which is 15 the first part of this exhibit? 16 A. That doesn't mean that to me. 17 Q. Okay. So, you see the document that 18 has the term "write a comment" and you see your 19 document which says "enclosed is the comment on 20 the accounting treatment of the mortgage-backed 21 securities," but you do not infer from that that 22 the comment that is at the beginning of A12205 was 17385 1 in response to a specific request regarding the 2 interim report that you had submitted? 3 A. No. 4 Q. That does not appear to be a logical 5 explanation for the two documents that we're 6 talking about here? 7 A. No. 8 Q. Okay. Let's focus then on the version 9 of the August 19th interim report that is attached 10 to this comment, which is at Page OW158937. 11 Now, do you recognize the handwriting 12 in the margin that says "see attached" as the 13 handwriting of Richard Ward, your field manager, 14 on the 1986 examination? 15 A. I do not recognize his handwriting. 16 Q. And Mr. Veis did not tell you about 17 Mr. Ward's testimony about that handwriting when 18 he talked to you about the documents that you 19 would be using in his examination of you on this 20 matter; is that correct? 21 A. No, he did not. 22 Q. He did not tell you what Mr. Ward 17386 1 testified about that handwriting? 2 A. No, he did not. 3 Q. Now, does it appear to you, 4 Ms. Carlton, that the origin of the document that 5 Mr. Veis asked you about was that the original 6 version of the August 19, 1986 memo was altered by 7 removing the original section and inserting the 8 comment that you wrote which he asked you about, 9 which is reflected in the first part of this 10 Exhibit A12205? 11 Does that appear to be what happened? 12 A. Go back and ask that again. Which two 13 documents are you referring to? 14 Q. Well, let's line them all up. That 15 might make it very easy. Let's first look at the 16 documents that he talked to you about: The 17 interim report marked A14017. 18 Do you see that? 19 A. Yes. 20 Q. Okay. And that says -- the first 21 paragraph under "investment securities" says, 22 "Contrary to Section 571, the accounting treatment 17387 1 for mortgage-backed securities MBS transactions 2 were improperly booked. During the six-month 3 period from January to June 1986, USAT deferred in 4 error in total of $36,542,392 in gains on sale of 5 mortgage-backed securities." 6 That corresponds pretty closely with 7 the other version of this August 19th interim 8 report, does it not, for the first paragraph? 9 A. Yes. 10 Q. And then the rest of it's different, is 11 it not? 12 A. Correct. 13 Q. And the rest of it appears to 14 correspond with the handwritten comment that you 15 provided to Mr. Ward, correct? You talk about the 16 Houston Chronicle article. 17 A. Right. 18 Q. And that's what you talked to Mr. Veis 19 about as the explanation for why you thought that 20 the September 4th document was actually an earlier 21 document than the August 19th document, correct? 22 A. I knew when I wrote the document. 17388 1 Q. Pardon me? 2 A. I knew when I wrote the documents, and 3 I knew that the narrative draft was the first 4 draft. 5 Q. And so, how -- well, let's just finish 6 walking through this. So, the next -- we have the 7 Version No. 1, which is the corrected copy which 8 goes to the general file 4, correct? Version 9 No. 2, which has "file ICF" on it. Then we have 10 Version No. 3, which is A12073, which has the term 11 "write a comment" in the margin. 12 Do you see that? 13 A. Yes. 14 Q. Then we have Version No. 4 which 15 someone has marked up by saying "see attached" and 16 crossing out the text and attaching your 17 handwritten comment, correct? 18 A. Correct. 19 Q. Now, do you see how that the language 20 that is crossed out on version No. 4 is the very 21 language that discusses the fact that USAT's 22 management did not want to recognize a gain on the 17389 1 sale of the mortgage-backs because of the desire 2 to maintain a higher yield and that they did so 3 only after discussions with the examiners and the 4 independent auditors? It is that part of the 5 version here that is crossed out and the other 6 version is substituted in its place. 7 Do you see that? 8 A. Yes. 9 Q. Now, do you have an explanation for why 10 this document shows things being crossed out and 11 "see attached"? 12 A. Because whoever crossed it out chose to 13 cross it out and enter into the new document what 14 they wanted to put in the new document -- 15 Q. Okay. 16 A. -- as an edit function. 17 Q. And you don't know who made this 18 change, do you? 19 A. No, not -- no. 20 Q. And Mr. Veis did not discuss that with 21 you prior to your testimony to the Court about the 22 origin of this document, correct? 17390 1 A. No, he did not. 2 Q. Does it appear to you, Ms. Carlton, 3 that somebody above you in the organization 4 decided that it might not -- that it might be 5 better not to memorialize in an official report 6 the fact that USAT management did not want to 7 recognize over $35 million of gains on the sale of 8 securities and did so only after discussions with 9 the examiners and the accountants? Does that 10 appear from this document to be what happened in 11 the creation of these documents, Ms. Carlton? 12 A. No. 13 MR. VEIS: Your Honor, it calls for 14 speculation, but she already answered the 15 question. 16 Q. (BY MS. CLARK) Wouldn't you agree, 17 Ms. Carlton, that the other version of this 18 document and the various changes that it went 19 through are important to show the judge if you're 20 trying to explain to the judge how this document 21 got created, as you and Mr. Veis did during your 22 testimony on direct examination? 17391 1 A. No. 2 Q. Now, Mr. Veis has asked you a 3 question -- I'm going to say maybe dozens of 4 times. It's the same question. He keeps putting 5 in front of you documents and asking you whether 6 these documents say anywhere in them that United 7 intended to sell high-yield bonds or 8 mortgage-backed securities in order to generate 9 gains to bolster profits. 10 Do you remember those questions that 11 Mr. Veis has been asking you during your testimony 12 in this hearing? 13 A. Yes. 14 Q. Now, you talked about these questions 15 with Mr. Veis before you took the stand, didn't 16 you? 17 A. No. 18 Q. Well, Mr. Veis -- do you remember 19 Mr. Veis showed you a couple of the documents 20 today and said that he had showed them to you 21 before and, therefore, you didn't have to take the 22 time to even read them to answer his question? I 17392 1 refer you to Exhibit A14088 and A14089. 2 Do you remember that he didn't even 3 give you a chance to read the documents? He just 4 put them down and asked you the question and you 5 answered it. 6 A. He asked the question, and I answered 7 "no" then. I answered "no" today. 8 Q. So, when you were going through the 9 questions that he was going to ask you before you 10 took the stand, you said "no" and you gave the 11 same answer on the stand, correct? 12 A. Correct. 13 Q. Now, Mr. Veis mentioned just a few 14 minutes ago that you have spent several days 15 reviewing documents in preparation for your 16 testimony in this hearing; is that correct? 17 A. That's correct. 18 Q. How long have you spent here actually 19 reviewing documents and meeting with Mr. Veis in 20 preparation for this hearing? 21 A. I have been here since July 15 waiting 22 to be called to testify. 17393 1 Q. And throughout this -- let's see. 2 What's the date today? July 30th. So, you've 3 been here for 15 days preparing for your 4 testimony? 5 A. I have been here 15 days waiting to be 6 called. 7 Q. And how much of that time were you 8 reviewing documents and meeting with Mr. Veis? 9 A. Maybe 60 to 70 percent of that time. 10 Q. So, you've spent probably ten days 11 meeting with him and reviewing documents to get 12 ready for your testimony? 13 A. Maybe that, yes. 14 Q. Now, Mr. Veis represented to 15 Judge Shipe that you hadn't had a chance to review 16 any documents before your deposition in 17 Washington, but that's not true, is it? You told 18 me when I deposed you that you had been in 19 Washington for four days reviewing documents. 20 Do you recall that? 21 A. Yes. 22 Q. And, in fact, during the deposition, I 17394 1 showed you 125 documents and we talked about 125 2 documents during the course of the deposition on 3 top of the four days that you had spent reviewing 4 documents and talking with Mr. Veis and the other 5 members of the Enforcement team who are 6 prosecuting this case; isn't that correct? 7 A. Restate that. 8 Q. You probably don't remember, but I 9 showed you lots of documents during the 10 deposition. We talked about a number of 11 documents. 12 Do you recall that? 13 A. Yes. 14 MR. VEIS: Your Honor, may I be heard 15 for a moment? If I misspoke regarding her review 16 of documents prior to the deposition, I apologize. 17 I had not recollected that. I will, however, 18 stand by the statement that I made that Ms. Clark 19 would not give us the information with respect to 20 which documents she would be asked about during 21 the deposition which we thought would -- at that 22 point would allow us to proceed more efficiently. 17395 1 There are approximately 30 boxes of documents 2 involved in these two examinations. 3 So, I think the thrust of the objection 4 that I made at that point is still valid. It's a 5 very large amount of material. Ms. Carlton had 6 not been directed to any specific material. To 7 draw some inference from a review of 30 boxes of 8 documents roughly over four days I think would be 9 unfair to the witness. 10 I apologize for my lack of recall of 11 the fact that she had actually looked at those 30 12 boxes prior to her deposition. 13 THE COURT: We'll take a short recess. 14 15 (Whereupon, a short break was taken 16 from 2:59 p.m. to 3:25 p.m.) 17 18 THE COURT: Be seated, please. We'll 19 be back on the record. 20 Ms. Clark, you may continue. 21 MS. CLARK: Thank you, Your Honor. 22 Q. (BY MS. CLARK) When we broke, 17396 1 Ms. Carlton, we were talking about the process by 2 which you prepared for your testimony in this 3 hearing. And you indicated that you had been in 4 Houston for 15 days but that you had only spent 5 about 10 of those days reviewing documents and 6 meeting with the OTS enforcement lawyers; is that 7 correct? 8 A. Correct. 9 Q. Now, when you were preparing for your 10 deposition, you also spent many hours meeting with 11 Mr. Veis and with the other members of the 12 prosecution team preparing for your testimony, 13 didn't you? 14 A. Yes. 15 Q. And Mr. Veis would tell you what 16 questions he was going to ask, and you would 17 practice your answers with him; is that correct? 18 A. No. 19 Q. Well, do you recall that I asked you 20 that very question in your deposition, 21 Ms. Carlton? 22 A. I don't -- I don't recall you asking 17397 1 that question. 2 Q. Okay. Let me just ask you, please, to 3 take a look at your deposition. I'll direct you 4 to Page 12. 5 A. The same volume that I have? 6 Q. Yes. It's the first volume. I think 7 it is, yeah. Page 12 is in the center column of 8 the page. 9 A. Okay. 10 Q. Do you see I was asking you about 11 whether you had talked with anybody other than 12 Mr. Veis in the Office of Thrift Supervision 13 during the time that you had been in Washington 14 preparing? 15 Do you recall that? 16 A. Yes. 17 Q. And you told me that several people had 18 come in and out but that you had had no detailed 19 discussions with anyone other than Mr. Veis. 20 Do you recall that? 21 A. Right. 22 Q. And do you recall that later, after a 17398 1 break, you came back and corrected that testimony 2 and told me that you had actually had substantive 3 discussions with Mr. Rinaldi and Mr. Leiman? 4 Do you recall that? 5 A. Yes. 6 Q. So, then we go on and we talk about how 7 much time you had spent talking with Mr. Veis. 8 You said several hours perhaps. 9 Do you see that? 10 A. Yes. 11 Q. And that you affirmed that you had, in 12 fact, talked about the work papers and gone 13 through -- that you had talked with Mr. Veis about 14 the work papers during the preparation for your 15 deposition in Washington last year. 16 Do you see that? 17 A. Yes. 18 Q. And then I asked you, "Did he ask you 19 questions about them?" 20 And you said, "He asked questions about 21 them." 22 And do you see where I said, "Did he 17399 1 ask you questions that he said he thought we might 2 be asking you during the course of the 3 deposition?" 4 And what did you answer? 5 A. "Yes." 6 Q. And then I said, "Did you practice your 7 answers with him?" 8 And your answer was? 9 A. "Some of them." 10 Q. Now, does that refresh your 11 recollection, Ms. Carlton, that in preparation for 12 your deposition, you practiced your answers with 13 Mr. Veis before we began the deposition? 14 A. That's what is stated. 15 Q. And is that what happened? 16 A. We went through different questions. I 17 don't know whether you would call it practice. I 18 don't know what -- what practice is for a 19 deposition or court. 20 Q. But when I asked you during the 21 deposition, "Did you practice your answers with 22 him," your answer was "some of them." 17400 1 Was that testimony truthful when you 2 gave it in May of 1997? 3 A. Describe to me what you call 4 "practice," and I will confirm that. 5 Q. Ms. Carlton, did you answer my question 6 during the deposition that you practiced some of 7 your answers with Mr. Veis? 8 A. That's what I stated. 9 Q. Now, Ms. Carlton, I didn't just ask you 10 once. I asked you twice during your deposition. 11 Do you recall that we discussed that 12 subject further after that first ex- change during 13 your deposition? 14 Do you recall that? 15 A. If it states here, then yes. 16 Q. Okay. Well, let's look at it. 17 Page 15. It's the bottom of the right-hand 18 column. 19 Do you see where I asked you, "Do you 20 recall what questions you practiced the answers 21 to, Ms. Carlton?" 22 And your answer was, "No specific 17401 1 question as far as practicing answers." 2 I said, "Well, you don't remember what 3 specific ones at this time?" 4 Do you see that? 5 A. Yes. 6 Q. And what did you answer? 7 A. "No. I mean, we didn't have no 8 specific list of questions and -- that I practiced 9 answers to. It was questions would be asked and I 10 would respond." 11 Q. And then I asked you, "And then he 12 would comment on your response?" 13 And your answer was? 14 A. "Yes." 15 Q. Now, Ms. Carlton, in the -- 16 MR. VEIS: Your Honor, I think just in 17 the interest of completeness, Ms. Clark should 18 read into the record the following question and 19 answer since she seems to be drawing some 20 inference from this that there's some question of 21 OTS influence on Ms. Carlton's testimony. I think 22 the next question and answer pretty much will set 17402 1 that to rest. I believe in the interest of 2 completeness of the record, it's required. 3 MS. CLARK: I'll be happy to, Your 4 Honor. I will -- let's see if I can find it. 5 Q. (BY MS. CLARK) "What did he tell you 6 about your responses? Do you remember any of his 7 comments?" 8 And what did you answer? 9 A. "I should tell the truth." 10 Q. And what did I say? 11 A. "That's good advice. What questions 12 did he tell you that he thought he would be asking 13 you today, Ms. Carlton?" 14 Q. And then we went on and discussed some 15 of those matters. 16 So, my question for you, Ms. Carlton, 17 is: In the ten days that you have been in Houston 18 getting ready for your testimony here by looking 19 at documents and meeting with OTS counsel, have 20 you been practicing your answers to the questions 21 that OTS counsel thought I might ask you? 22 A. No. 17403 1 Q. Well, have you been practicing the 2 answers to the questions that Mr. Veis was going 3 to ask you? 4 A. No. 5 Q. Now, why would you go to the trouble, 6 Ms. Carlton, of practicing your answers for the 7 deposition and not practicing your answers for the 8 real thing, for the trial? 9 A. My focus here was focusing on the 10 examination process, and I focused on the review 11 of the work papers. That was the strategy in 12 which I prepared for this trial. 13 Q. Isn't it true, Ms. Carlton, that they 14 talked to you about the fact that I might ask you 15 again whether you practiced your answers? Didn't 16 they talk to you about the fact that I very likely 17 would ask you again whether you had practiced your 18 answers? 19 A. I don't know that question, no. 20 Q. You don't remember them talking to you 21 about that? 22 A. No. 17404 1 Q. Well, you've looked at, presumably, 2 lots of documents, 30 boxes of documents in the 3 last ten days or at least some portion of 30 boxes 4 of documents, Ms. Carlton. And Mr. Veis has asked 5 you many questions about whether documents that he 6 put in front of you disclosed that United was 7 selling securities to generate gains to bolster 8 profits. 9 Based on the documents that you have 10 reviewed and your own recollection, Ms. Carlton, 11 wouldn't you agree that it would be a very unfair 12 criticism of United's management to say that they 13 were trying to hide from the regulators the fact 14 that they were selling appreciated assets to 15 generate profits? Wouldn't that be a very unfair 16 criticism based on the documentation that you have 17 seen and your own recollection? 18 A. No. 19 Q. Well, would you agree with me that if 20 that's what they were trying to do, that they 21 certainly failed miserably? 22 A. No. 17405 1 Q. Well, let's look at the record, if we 2 can, Ms. Carlton. 3 First of all, what, if anything, do you 4 know -- do you personally know about whether 5 United did make sales out of its mortgage-backed 6 securities portfolio or its high-yield bond 7 portfolio to generate gains to bolster profits? 8 What do you know about the facts on 9 that? 10 A. When you review the financial analysis 11 of the institution, you will find schedules that 12 detail out gains and sales that took place within 13 United. And those are documented by quarter 14 within those work papers. And it breaks it out by 15 the categories in which non-operating income was 16 taken in each quarter for the institution. 17 Q. Well, you were aware during the '86 18 exam, were you not, that United was, in fact, 19 relying on non-operating income to generate any 20 positive income at all? You were aware of that, 21 weren't you? 22 A. Yes. 17406 1 Q. And you also knew that the sales of 2 investment securities was the single largest 3 source of funds provided to United for that entire 4 year. 5 You knew that, didn't you? 6 A. We broke out -- I won't say that to be 7 fact, what you just stated. We provided an 8 operational statement comment that will 9 substantiate what income was -- the percentage of 10 what composition the income was by mortgage-backed 11 securities of USAT. I won't say that it's the 12 percentage that you just quoted, but the comment 13 would reflect those percentages. 14 Q. Let me see if I can refresh your 15 recollection. 16 Would you turn in your deposition to 17 Page 180, please? This is a portion of the 18 deposition where we were going over the 1985 19 financials, and I'll draw your attention to the 20 paragraph -- or the question that begins, "Turning 21 to the next page with Bates stamp ending 506" and 22 ask you to just read that to yourself beginning 17407 1 with that question and going through the middle of 2 the -- of Page 180. 3 A. (Witness reviews the document.) Where 4 do I stop at? 5 Q. Stop in the middle of Page 180, which 6 is about 2 inches down from the top of the first 7 column on the next page. 8 A. Okay. 9 Q. Now, do you recall that you did, in 10 fact, review the 1985 financials as part of your 11 work in the 1986 exam? That's what the context of 12 this discussion in your deposition was. 13 A. Yes. 14 Q. And we're talking about the fact that 15 the financials show that the sale of investment 16 securities had gone from around 200 -- that can't 17 be -- $200,000 in 1984 up to over 1 billion 3 in 18 1985. 19 Do you see that reference? 20 A. That could be true. 21 Q. I suspect that there may be some zeros 22 missing there. But then I ask you, "Would that be 17408 1 a significant change that you would notice?" And 2 you say -- 3 A. "Yes." 4 Q. And I say, "And would that have any 5 importance to you in planning the examination 6 procedures that you would employ in the course of 7 your examination?" 8 And you said, "It would be noted for 9 review," correct? 10 A. Right. 11 Q. And then I asked you, "In fact, that's 12 by far the largest item under the title funds 13 provided," isn't it? 14 And you said? 15 A. "Just looking at numbers, it appears to 16 be." 17 Q. Okay. So, does that refresh your 18 recollection that in the course of the 1986 exam 19 you were aware that the sale of investment 20 securities was the single largest source of funds 21 for United? 22 A. We were aware that mortgage-backed 17409 1 securities were a part of that. 2 Q. Let's look at some of the documents 3 that Mr. Veis has asked you about in his 4 examination, Ms. Carlton, to see what they reveal 5 about the question of whether United's management 6 was trying to hide from the regulators the fact 7 that it was relying on non-operating income, 8 including the sale of investment securities, the 9 subject that Mr. Veis' questions have addressed 10 for the last two days. 11 MR. VEIS: I don't believe that we have 12 ever alleged the fact that they were relying on 13 non-operating income. So, I'm not sure what the 14 relevance of this particular question is. 15 THE COURT: Well, the question included 16 a reference to securities. 17 You are alleging something about that, 18 aren't you? 19 MR. VEIS: Well, we are alleging 20 something about securities, that is correct. But 21 the allegation is not that the institution was 22 unaware that securities had been sold -- I'm 17410 1 sorry -- that the regulators were unaware that the 2 securities had been sold. 3 The question -- indeed, my questions to 4 Ms. Carlton over the past several days have 5 related to whether or not the regulators had 6 information with respect to the intent and 7 strategy that was undertaken. 8 So, I mean, I think this is of limited 9 relevance here. But obviously, it's Ms. Clark's 10 examination. 11 Q. (BY MS. CLARK) Let's have you look 12 again, if you would, please, at A11011, which is 13 in the record at Tab 256. 14 MR. VEIS: I'm sorry. What was that 15 number? 16 MS. CLARK: A11011. 17 MR. GUIDO: The tab number? 18 MS. CLARK: Tab 256. 11011. 19 MR. VEIS: I don't have it under that 20 number. What is the document? 21 MS. CLARK: It's the Selby/Haas memo. 22 MR. VEIS: All right. Thank you. 17411 1 Q. (BY MS. CLARK) Ms. Carlton, do you 2 recall that Mr. Veis asked you about this document 3 during your direct examination? 4 A. Yes. 5 Q. And this is a memo from Joe Selby to 6 Frank Haas relating to certain applications that 7 were pending as you described it, correct? 8 A. Correct. 9 Q. Now, Mr. Veis mentioned that -- and by 10 the way, you had identified your own handwriting 11 on the top of the second page, which is actually 12 the first page of the Selby memo. 13 The word "important" is what you wrote 14 on this document on the top, correct? 15 A. Correct. 16 Q. Now, Mr. Veis only asked you about one 17 of the two applications that are being described 18 and evaluated in this memorandum. 19 Do you recall that? 20 A. Yes. 21 Q. He asked you about the application for 22 permission to count subordinated debt as 17412 1 regulatory capital. 2 That's the part of it that he talked to 3 you about, correct? 4 A. Correct. 5 Q. This memorandum being sent to Mr. Haas 6 also evaluates another application that was 7 pending at the time, which was to seek a 8 modification of the net worth maintenance 9 condition that the Federal Home Loan Bank Board 10 had placed in a resolution relating to MCO 11 Holdings and Federated Development Company. 12 Do you recall that? 13 A. It's a part of this document. 14 Q. So, this document actually evaluated 15 two pending applications which were being 16 evaluated in tandem as reflected in Ginger Baugh's 17 files memo which is the first page, correct? 18 A. (Witness reviews the document.) That 19 among other issues. 20 Q. Do you remember when Mr. Veis -- 21 MR. VEIS: Your Honor, if I might, I 22 would like to note for the record I believe I 17413 1 stated yesterday that I don't believe the cover 2 memo was on the version of the document that was 3 in the work papers. 4 So, unless my memory misserves me, 5 Ms. Carlton never testified that she had ever seen 6 or not seen the Ginger Baugh memorandum. I hope 7 my memory is correct. Certainly the copy that I 8 prepared from that we found in the work papers did 9 not have that memorandum attached. 10 MS. CLARK: Let's just clarify that. 11 Q. (BY MS. CLARK) Ms. Carlton, my 12 document was produced from the OTS from the 13 examination work papers of the 1986 examination as 14 reflected by the Bates numbers in the bottom 15 left-hand corner, and it -- and as I read it, it 16 has your initials on the first page on the bottom; 17 is that correct? 18 A. Those are my initials. 19 Q. Okay. So, you did see the cover memo 20 on this document? 21 MR. VEIS: If I might clarify, it 22 appears that the copy that Ms. Carlton prepared to 17414 1 testify from and which I had initially intended to 2 show her is from a different -- actually, a 3 different document. It's identical substantially 4 with respect to the Selby/Haas memo. However, the 5 Bates numbers that she prepared from that I was 6 going to offer before I was told that the document 7 was already in evidence actually was OW120666 8 through OW120677. So, I just think the record 9 needs to be clear so Ms. Carlton knows what she's 10 talking about. 11 MS. CLARK: Your Honor, is there any 12 difference between the two documents? 13 MR. VEIS: Other than the version that 14 she looked at when she originally prepared to 15 testify did not include the cover memo because 16 that's a separate document from a separate file. 17 There is redundancy in the work paper files, and I 18 just want to be clear. 19 THE COURT: The cover page has her 20 initial on it? 21 MR. VEIS: It does, but I suspect that 22 she didn't focus on that because she was working 17415 1 with a different file as she prepared to testify. 2 Q. (BY MS. CLARK) Well, we've settled 3 anyway that this is a document that you reviewed 4 and initialed in the course of your work as an 5 examiner. 6 Is that settled? 7 A. Yes. 8 Q. Now, Mr. Veis in his examination 9 pointed out that your preliminary finding in your 10 first interim report had -- on USAT's net worth 11 had already found its way into Mr. Haas' memo a 12 matter of a few days after your memo had been 13 transmitted to supervision. 14 Do you recall that testimony? 15 A. Yes. 16 Q. Now, I'd like you to look, if you 17 would, at the Pages 7 and 8 and ask you a few 18 things about those pages. 19 A. (Witness reviews the document.) 20 Q. At the top of Page 7, there is a 21 paragraph that carries over, and I'd like you to 22 focus on the middle of that paragraph and tell me 17416 1 what this memorandum says about gain on the sales 2 of investment activities. 3 A. (Witness reviews the document.) Okay. 4 Q. Okay. Now, do you see where it talks 5 about how net income from gains on the sale of 6 non-operating items, primarily investment 7 activities, had produced $8.6 million of income 8 for the six-month period? 9 Do you see that? 10 A. Yes. 11 Q. Then it goes on to talk about how 12 United had expanded its security activities in 13 order to compensate for problems in its loan 14 portfolio resulting from the current depressed 15 economy in Houston and in the entire Texas market. 16 Do you see that? 17 A. Yes. 18 Q. And then what does Mr. Selby go on to 19 say about the fact that -- about United's 20 securities activities? Can you just read that for 21 us, please? 22 A. Aloud? 17417 1 Q. Yes, thank you. 2 A. "To its credit, the association has 3 thus far profited from the investments to the 4 extent that earnings on securities transactions 5 have offset severe net operating losses. 6 Accordingly, United believes that gains and losses 7 on these transactions should be considered an 8 operating -- as operating items." 9 Q. Ms. Carlton, were you the source of 10 that information that Mr. Haas included in the 11 memorandum that he -- sorry -- that Mr. Selby 12 included in his memorandum to Mr. Haas? 13 A. That statement? 14 Q. Yes. 15 A. I would have to check in the interim 16 report to see if that came from that. 17 Q. Well, if -- not to take the time, but 18 if the interim report that had been received days 19 before this did not contain any such language, 20 would you conclude that you were not the source of 21 Mr. Selby's information that United believed that 22 gains and losses from these sales of investment 17418 1 securities should be considered as operating 2 items? 3 A. It's possible that this statement did 4 not come from the examination process. 5 Q. Now, Mr. Veis made a point of asking 6 you how long it had been since the last 7 examination when you began your 1986 exam. 8 Do you remember that? 9 A. Yes. 10 Q. And you told him that the last 11 examination had been nearly three years before. 12 Do you recall that testimony? 13 A. That's correct. 14 Q. You did not mean to suggest to the 15 Court, did you, that United had escaped regulatory 16 supervision and scrutiny during the three years 17 since its last examination? 18 A. I only stated that they had not had an 19 examination in that length of time. 20 Q. And you would not suggest to the Court, 21 would you, that the fact that they had not had an 22 examination meant that they had escaped regulatory 17419 1 supervision and monitoring during the interim? 2 A. I would say unless an examination is 3 conducted on an institution, regulators do not 4 know in detail or significant events that take 5 place in institutions just by monitoring reports. 6 Q. Okay. Well, can we agree that it is 7 obvious that Mr. Selby and his staff and the 8 Federal Home Loan Bank of Dallas had sources of 9 information about what was going on at United 10 quite separate and apart from your contribution as 11 an examiner? 12 Can we agree on that? 13 A. Yes. 14 Q. And, in fact, do you recall that Neil 15 Twomey had a supervisory analyst named 16 Ginger Baugh who did perform the role of 17 monitoring activities at United apart from and on 18 a separate track from the examination process that 19 you were involved in? 20 A. Yes. 21 Q. Well, let's look at what the 22 supervisory staff was saying about United's 17420 1 management during this period. Go to the bottom 2 of the page. You'll see under a section called 3 "supervisory analysis" -- do you see the paragraph 4 that begins "while United failed"? 5 A. Yes. 6 Q. Now, do you recall when you read this 7 document in the course of the examination taking 8 note of the fact that the association was 9 considered one of the stronger financial 10 institutions in the 9th district? 11 A. I do recall that. 12 Q. Okay. And do you recall your reaction 13 when you read that "Notwithstanding the findings 14 of the current examination, United has maintained 15 a strong capital base, meeting its net worth 16 requirements for each quarter preceding the 17 examination"? 18 A. I recall that. 19 Q. And this is a memorandum that the 20 Federal Home Loan Bank of Dallas was submitting to 21 the supervisory people in Washington after having 22 received your interim report reporting on net 17421 1 worth deficiency, correct? 2 A. Right. 3 Q. Turn over to the next page. Do you see 4 the paragraph that begins "moreover"? 5 What was the supervisory staff saying 6 about the high level of scheduled items that you 7 had reported in your interim reports and 8 ultimately in your final report for the 1986 9 examination? 10 Do you see that? 11 A. Yes. 12 Q. What do they say? 13 A. "United's management is aggressively 14 pursuing a resolution to its loan problems, 15 following collection procedures and loan 16 foreclosures rather than loan workouts." 17 Q. Ms. Carlton, was there some reason why 18 you didn't read the first sentence which says, 19 "Moreover, in light of the depressed economy in 20 Texas, the high level of scheduled items is not 21 surprising"? 22 A. You asked me to start on the second 17422 1 sentence. 2 Q. Oh, if I did, I stand corrected. I 3 don't recall doing that. Let's go on to the next 4 paragraph. 5 Do you see the discussion of United's 6 securities activities in the next paragraph? 7 A. Yes. 8 Q. Now, again, in this memo, supervision 9 is discussing an application -- actually, two 10 applications. They are evaluating the association 11 in the context of making recommendations on 12 whether Washington should approve two 13 applications, and they are evaluating the 14 association's securities activities. 15 What do they say in that paragraph 16 about the net operating deficiencies and its 17 relationship to the securities activities? 18 A. Are you still in the second paragraph? 19 Q. Yes. "Further, while net operating 20 income." What are they saying to Washington in 21 that first sentence? 22 A. "Further, while net operating income 17423 1 does not meet the eligibility requirements, United 2 has enjoyed an increasing level of profitability 3 from its securities investments." 4 Q. Okay. So, aren't they saying that 5 United is not generating operating income but it 6 is able to generate profits from its securities 7 activities? Isn't that what that sentence says? 8 A. Yes. 9 Q. So, supervision was well aware of the 10 fact that in the absence of operating profits, 11 United was generating profits from its investment 12 activities. 13 That's what this document written by 14 supervision says, is it not? 15 A. Yes. 16 Q. It talks about how the sophistication 17 of the investment department had been examined and 18 documented by Jonathan Scott. 19 Do you recall who Jonathan Scott was? 20 A. He was the person in the Bank of 21 Dallas. 22 Q. And what was his role at the Bank of 17424 1 Dallas in the 1986 time frame? 2 A. I don't know. 3 Q. Do you recall that he came to United to 4 evaluate USAT's investment activities at the 5 request of Neil Twomey? 6 A. I was not aware of that. 7 Q. You were not aware of it? Mr. Twomey 8 didn't tell you that he sent Jonathan Scott into 9 the institution to evaluate its investment 10 activities? 11 A. No, he did not. 12 Q. And you haven't ever heard that since 13 then? 14 A. I have heard that since then, but I was 15 not aware of that at the time. 16 Q. When did you learn that? 17 A. I was -- some question was asked 18 somewhere between the deposition -- it may have 19 been you or someone asked that question. 20 Q. Okay. 21 A. That was my first time that I was made 22 aware of it. 17425 1 Q. I understand. So, at the time you were 2 working as the examiner-in-charge of the USAT 3 examinations for two years in a row, you were not 4 made aware that Neil Twomey had sent in an 5 official of the Federal Home Loan Bank to 6 independently evaluate the securities activities 7 at United; is that correct? 8 A. That's correct. 9 Q. I take it then he didn't consult with 10 you before he did that, correct? 11 A. If I wasn't aware of it, that's what 12 that means. 13 Q. That's what I figured. All right. 14 Let's go on. 15 "It appears that a sufficient level of 16 net income can be generated by United's securities 17 transactions to meet the estimated 18 6.75-million-dollar annual interest expense of the 19 proposed subordinated debt." 20 Do you see that? 21 A. Yes. 22 Q. Now, when you reviewed this, did you 17426 1 understand that to mean that they were considering 2 whether to approve the subordinated debt based in 3 part on the question of whether United could 4 generate enough profits from its securities 5 activities to cover the debt service on that 6 instrument? 7 A. When I reviewed it, I didn't focus on 8 the application because it was not going to be a 9 part of my decision to make a decision on that. 10 Q. So, that was not part of the document 11 that you considered important when you put the 12 word "important" on the first page? 13 A. No. Debt applications are not part of 14 the examination process. Therefore, we do not 15 make judgment on those applications. So, 16 information to be considered was not in my purview 17 of the examination to analyze. 18 Q. So, what was important about this 19 document was the evaluation of USAT's activities 20 and the information that this document 21 contained -- would that be fair -- rather than the 22 specific question of whether the application 17427 1 should be approved or disapproved? 2 A. This information -- this document was 3 provided for us to review to be aware of the 4 applications that were outstanding, not to make a 5 decision on it. 6 Q. Sure. Okay. 7 Let's go to the last paragraph. Do you 8 see what the supervisory staff said about the 9 qualifications of management in July 1986? 10 A. (Witness reviews the document.) 11 Q. I'm asking you to direct your 12 attention -- 13 A. On Page 9? 14 Q. -- to the bottom of Page 8, the 15 paragraph that begins "There is no indication that 16 the institution does not qualify on the basis of 17 its management. Management of United is 18 considered to be acceptable in as much as United 19 is routinely approached regarding utilization of 20 its present management per management contracts 21 with problem institutions. It should be noted 22 that many of the current senior management team of 17428 1 United and UFG are also the senior management of 2 MCO and Federated." 3 Do you see that paragraph? 4 A. Yes. 5 Q. Now, do you recall discussing with 6 anybody at the Federal Home Loan Bank of Dallas in 7 the supervisory staff their observation in this 8 document that many of the senior management at 9 United and UFG were also members of senior 10 management of MCO and Federated? 11 A. We had detailed discussions about 12 management before the examination was over with. 13 Q. Do you recall discussing this 14 particular fact that is discussed or set forth, I 15 should say, in this memorandum from Mr. Selby to 16 Mr. Berbakos in the last sentence of Page 8? 17 A. We did not have a discussion based on 18 this memorandum. We had discussions about what we 19 felt about management. 20 Q. And did you discuss with them the fact 21 that many of the current senior management team of 22 United and UFG were also senior management of MCO 17429 1 and Federated? 2 A. We presented that in our report. 3 Q. So, you were aware of that, as well. 4 Is that what you're saying? 5 A. Right. 6 Q. You were aware of that, and the 7 supervisory people were also aware of it since 8 they put it in this memo, correct? 9 A. Right. 10 Q. But you don't ever remember that coming 11 up as an issue of -- that was to be discussed 12 between you and supervision; is that correct? 13 A. The discussions that we had on 14 affiliation with the holding company and MCO 15 Holdings was to -- in the interim specialist 16 scoping which we had to identify management and 17 owners of those affiliate companies and their 18 involvement, ownership, and to determine any 19 conflict of interest that we may have had or we 20 may have found. 21 Q. And that's something that you would 22 always be alert for in your role as an examiner, 17430 1 is it not? 2 A. In order to determine conflict of 3 interest or affiliate transactions, you have to 4 know the owners of the institution, any 5 affiliations directly or indirectly, in order to 6 make those assessments. 7 Q. And that's something that you would 8 always be alert to and focus on during the course 9 of the examination; is that correct? 10 A. Yes. 11 Q. Now, I think just perhaps to correct 12 the record, as I understood or heard your 13 testimony about this document when Mr. Veis was 14 asking you about it, you testified that Mr. Haas 15 was working for the -- for the Federal Home Loan 16 Bank of Dallas, and I just wanted to show you one 17 other document to see whether it would refresh 18 your recollection as to where Mr. Haas worked. 19 What we'll be showing you is Exhibit B1125, 20 Ms. Carlton. 21 B1125 is another document from the work 22 papers of the 1986 exam. I think the copying is 17431 1 too faint for you really to confirm it. I believe 2 that your initials are on the bottom of that 3 document, Ms. Carlton. 4 But I really wanted just to use this do 5 document to try to refresh your recollection as to 6 what the office of District Banks was and where it 7 was located. 8 Do you see that Mr. Haas is listed on 9 the Selby memo as the director of the Office of 10 District Banks, and that's on Exhibit A11011. On 11 Exhibit B1125, we have the transmittal letter by 12 which Mr. Twomey sent this memo to a Mr. Berbakos 13 who was the assistant director of the same office. 14 And do you see that that's in the 15 Federal Home Loan Bank Board in Washington, D.C.? 16 A. Yes. 17 Q. Okay. Did you know Mr. Berbakos or 18 Mr. Haas from the time that you were in 19 Washington? 20 A. I do not know -- this is my -- I do not 21 know them. 22 Q. Now, from your experience, Ms. Carlton, 17432 1 when the executive vice president of the Federal 2 Home Loan Bank of Dallas sends a written 3 submission to the Federal Home Loan Bank in 4 Washington, does he make sure that the information 5 in the submission is correct and reliable? 6 MR. VEIS: Your Honor, I don't believe 7 that Ms. Carlton is aware of the practices -- or 8 there has been no testimony she's aware of the 9 practices of the gentleman in question as to what 10 he does or doesn't make sure of. I think it's 11 beyond any testimony that she's given or any 12 testimony as to what she might know. 13 THE COURT: Well, maybe she knows. 14 I'll deny the objection. You may answer. 15 A. I cannot attest to what Mr. Selby did 16 as far as verification of his information. I do 17 know that you have a collection of information 18 gathered from different sources. And just like 19 when we went in the institution, the Bank of 20 Dallas did not know it had problems. They could 21 be using database on data prior to a certain time 22 and carrying that data forward which would not -- 17433 1 if you -- at a certain time continued to reflect 2 the condition of a situation. 3 Q. (BY MS. CLARK) Now, you're not 4 suggesting to the Court, are you, that Mr. Haas, 5 as executive vice president of the Federal Home 6 Loan Bank of Dallas, would send a submission to 7 the Federal Home Loan Bank Board in Washington, 8 D.C. about an application that was pending without 9 verifying that what he was saying had support in 10 the facts? You're not making that suggestion, are 11 you? 12 A. No, I'm not. 13 Q. Based on this document which we have 14 gone over in some more detail than you did with 15 Mr. Veis in your direct examination, would you 16 agree with me that the supervisory apparatus in 17 both Dallas and Washington were well aware that 18 United was relying on the sale of investment 19 securities and other non-operating income to 20 generate earnings and maintain capital? 21 A. Yes. 22 Q. Let's look at what you yourself said 17434 1 about United's reliance on non-operating income, 2 including sales of investment securities. I'd ask 3 you to look again at Exhibit A14020, which 4 Mr. Veis asked you about. 5 This is the transmittal letter from 6 Danny Thomas to United Board and attached are 7 various internal documents relating to the 8 examination process and with, finally, the actual 9 official report of examination. 10 Is that what this is? 11 A. Yes. 12 Q. Let me ask you -- before we get to what 13 you said, let's go to Mr. Thomas' letter. And 14 I'll ask you to turn to Page 2 of the supervisory 15 letter transmitting the exam and to the paragraph 16 that begins "We also note." 17 Do you see that paragraph? 18 A. Yes. 19 Q. Tell me, if you would, please, what 20 does the last sentence of that supervisory letter 21 from Mr. Thomas say about United's reliance on 22 non-operating income? 17435 1 A. "Of further note is United's history of 2 net operating losses and its dependence on 3 non-operating income to produce profits." 4 Q. Let's turn to Page 2 of your report 5 summary. And do you see in your report summary 6 that you say the same thing? You say, "The 7 association's profitable operation is due to 8 non-operating items (See Comment 4)." 9 Do you see that? 10 A. Yes. 11 Q. First of all, where do you find 12 Comment 4? 13 MS. CLARK: While she's looking at 14 that, Your Honor, may I please offer B1125, the 15 letter from Mr. Twomey to Mr. Berbakos? 16 MR. VEIS: No objection, Your Honor. 17 THE COURT: Received. 18 A. Comment 4 is really Comment 5. 19 Q. (BY MS. CLARK) You're reminding me of 20 something that the judge pointed out to us, I 21 believe, that there's a problem with the 22 numbering. 17436 1 So, the comment to which you were 2 directing the association's management and board 3 was actually the comment on operating results? 4 A. That's correct. 5 Q. What do you say about United's 6 non-operating income in the second paragraph of 7 that comment to the United board in the 8 examination report? 9 A. "Non-operating income is comprised of 10 gains on loan sales, sales of branches, 11 mortgage-backed securities, corporate bonds, and 12 equity securities. 98 percent of non-operating 13 income was derived from the sale of MBS and equity 14 securities, totaling 48.5, round numbers, and 30.1 15 for the quarter ending March '86 and June '86 16 respectively." 17 Do you want me to read on? 18 Q. No. I think that's sufficient. Thank 19 you. 20 So, what you're pointing out to the 21 board of United is that the examination staff is 22 aware that United is generating non-operating 17437 1 income from the sales of mortgage-backed 2 securities and corporate bonds. 3 Do you interpret -- 4 MR. VEIS: It doesn't talk about 5 corporate bonds there. It mentions 6 mortgage-backed securities and equity securities. 7 Q. (BY MS. CLARK) Ms. Carlton, focusing 8 on the first sentence, are you telling the board 9 that you are aware that United is relying on 10 non-operating income comprised of gains on sales 11 of mortgage-backed securities, corporate bonds, 12 and other assets? 13 A. Yes. 14 Q. And then you go on and you discuss the 15 composition of those -- that portion of 16 non-operating income. And you state that it was 17 derived 98 percent from the sale of mortgage-backs 18 and equity securities. Correct? 19 A. Correct. 20 Q. So, that's a fact that you were very, 21 very well aware of at the time you completed your 22 examination report and transmitted your results to 17438 1 the United board. 2 Is that a fair statement? 3 A. Yes. 4 Q. Let's look at Exhibit A14055 again. 5 And by the way, Mr. Veis, when he was asking you 6 whether this document or that document revealed 7 that United was selling securities, 8 mortgage-backed securities, and high-yield bonds 9 to generate gains to bolster profits did not ask 10 you to focus on that language in your own 11 examination report, did he? 12 A. No. 13 Q. Okay. Let's look at Exhibit A14055 14 again. 15 A. (Witness reviews the document.) 16 Q. Actually, I'm going to put that exhibit 17 to the side for the moment because I'm not exactly 18 sure of its status, and let's go directly to the 19 A14069, please. 20 I'm going to ask you to focus, if you 21 will, on the page that has the Bates No. 128895. 22 But before you do that, could you just describe 17439 1 again what this document is? 2 A. This is an interim report prepared 3 during the 1987 examination that is dated 4 January 15, 1988. 5 Q. Now, if you would, turn to the 6 "operations" section and, in particular, the 7 portion under "financial analysis." And let's see 8 what you were telling your -- telling Mr. Twomey, 9 the supervisory agent, was the status of United's 10 profitability at that point. 11 What did you tell Mr. Twomey was the 12 way in which United had been maintaining its 13 profitability? 14 A. You want me to read it? 15 Q. If you want to read it, that's fine. 16 If you simply want to explain to us what it is you 17 were telling Mr. Twomey, you were explaining to 18 him how United had maintained its profitability. 19 And what did you tell him about that? 20 A. We stated that "From July of '86 21 through September of '87, USAT had earned 22 approximately $3.005 million, that USAT has 17440 1 remained marginally profitable, and this 2 profitability had been maintained by generating 3 significant amounts of non-operating income." 4 That's further broken down into 5 non-operating income for the last five quarters 6 ending September 1987 amounting to 129 million. 7 And we gave a breakdown of that income, 8 identifying it as coming from the gain on the sale 9 of mortgage-backed securities, sale of investment 10 securities, futures contracts, and loan sales. 11 Q. So, you were pointing out to Mr. Twomey 12 that United had been maintaining its profitability 13 only by gains of sales on mortgage-backed 14 securities, gains on sales of investment 15 securities, gains on sales of future contracts, 16 and loan sales. 17 Isn't that what you're explaining to 18 him about how USAT had remained marginally 19 profitable? 20 A. Yes. 21 Q. And there's no doubt in your mind that 22 that is something that Mr. Twomey was familiar 17441 1 with, if only through your own written reports to 2 him. 3 Would that be a fair statement? 4 A. Correct. 5 Q. Let's look -- and by the way, Mr. Veis 6 didn't ask you to focus on this language when he 7 asked you his questions about whether -- about the 8 question of selling mortgage-backed securities and 9 high-yield bonds in order to generate gains to 10 bolster profits, did he? 11 A. No. 12 Q. Now, how did you figure that out, 13 Ms. Carlton? How did you figure out what you put 14 in this paragraph of your report to Mr. Twomey? 15 A. In conducting the financial analysis, 16 we select the non-operating account numbers. And 17 based on that information, you -- we did a 18 spreadsheet which scheduled out the non-operating 19 income and obtained a description as to the source 20 of that income. 21 Q. Let's look at your second interim 22 report, which is A14070. I would ask you to look 17442 1 at Page 2 of Exhibit A14070, which was your 2 March 10, 1988 interim examination report directed 3 to Neil Twomey. I'm told that that's in the 4 record at Tab 1497. And in particular, focus on 5 the discussion of operations. 6 Is the discussion of operations in this 7 interim report reporting basically the same 8 situation you reported in the prior one, which was 9 United's lack of operating earnings in the absence 10 of the gains on sales of securities referred to in 11 the prior report? 12 A. In the last sentence, it states that 13 "The institution has been unable to generate 14 sufficient and stable income from its 15 interest-earning portfolio to stem the adverse 16 operating trend." 17 Q. So, there's no doubt in your mind, is 18 there, Ms. Carlton, that Neil Twomey was well 19 aware that in the absence of the gains on sales of 20 securities and other non-operating income, USAT 21 would not be maintaining its profitability? 22 A. He had access to the reports. 17443 1 Q. Turn, if you would, to A10663, another 2 document that Mr. Veis asked you about during your 3 direct examination. It's Tab 184 in the record. 4 MR. VEIS: What is that document? 5 MS. CLARK: It's the business plan 6 dated August 29, 1986. 7 Your Honor, I have lost my own copy of 8 the document, and it's so long that I'm not sure I 9 can find quickly the portion to which I wanted to 10 address her attention. So, I will pass that for 11 the moment and come back to it later. 12 Q. (BY MS. CLARK) Let me ask you to go 13 directly to A14061. 14 MR. GUIDO: 14061, did you say? 15 MS. CLARK: Yes. 16 MR. VEIS: 104 or 140? 17 MS. CLARK: 140. 18 MR. VEIS: Thank you. 19 Q. (BY MS. CLARK) Do you have that in 20 front of you, Ms. Carlton? 21 A. Yes, I do. 22 Q. Do you recall that the state examiners, 17444 1 in their report of examination in 1986, also 2 commented on United's lack of operating income and 3 its reliance on non-operating income? 4 I will direct your attention to a 5 particular portion of the document, but I wanted 6 to ask you first: Do you recall that the state 7 examiners who were there in the association at the 8 same time you were also noted that United was 9 relying on non-operating income to remain 10 profitable? 11 A. That's stated here on Page 4. 12 Q. Now let's focus on United management's 13 response to that comment from the state examiners. 14 And let's look at Page 4 of the document which has 15 Bates No. 128883 -- 873. 16 Do you see the response of United's 17 board to the State Savings and Loan Department 18 commissioner, Mr. Bowman, concerning the comment 19 that United was relying on non-operating income to 20 remain profitable? 21 Do you see that? 22 A. The "AB"? 17445 1 Q. Under the heading "operations." Do you 2 see where it says, "The board, as well as senior 3 management, share the concern about the depressed 4 condition of operating earnings"? 5 A. Yes. 6 Q. So, what did United's board say to the 7 state regulators when the state regulators 8 commented on the fact that they were relying on 9 non-operating income to remain profitable? 10 A. Here it states "The association" -- 11 "However, the association believes it's important 12 to continue to attempt to maintain profitability 13 through whatever prudent means exist." 14 Q. Okay. And they go on to say, "The 15 association is aware that non-operating income in 16 the form of sales of securities and other sales 17 have been sufficient to maintain the association 18 at a profitable level, and United will continue to 19 utilize these activities to enhance the 20 investments of its stockholders and the security 21 of its depositors." 22 Do you see that? 17446 1 A. Yes. 2 Q. Now, Mr. Veis, when he asked you about 3 this document, didn't ask you about this 4 paragraph, did he? 5 A. No. 6 Q. He didn't ask you whether there was 7 anything in this paragraph that would tell a 8 person that United was selling securities for the 9 purpose of generating gains to maintain 10 profitability. 11 He didn't ask you that question about 12 this paragraph, did he? 13 A. No. 14 Q. We'll do just a couple more of these. 15 A14068, please. This is a document that you 16 identified, I believe, as a -- well, tell us again 17 what is this document, if you will. 18 A. What was that number again? 19 Q. It's A14068. Do you have it there? 20 A. Should be in here. 21 22 17447 1 (Discussion held off the record.) 2 3 A. What was your question again? 4 Q. (BY MS. CLARK) What is this document? 5 A. This document is a significant 6 supervisory case report that is put together in 7 the Dallas supervisory side and is used in making 8 decisions at that level. 9 Q. And the date of the document? 10 A. May 1st, 1988. 11 Q. And you reviewed this document in the 12 course of your examination? 13 A. Yes, I did. 14 Q. And did your supervisor, Joe Cooper, 15 also review this document? 16 A. He read it. 17 Q. And that's -- 18 A. He signed that he read it. 19 Q. Go ahead. 20 A. He signed that he read it. 21 Q. Thank you. 22 And you're referring to the handwritten 17448 1 notation on the first page which says "Read 2 5/10/88" and then in quotation marks, "Joe." 3 Is that the way Joe Cooper indicated 4 his review of work papers and other materials in 5 the examination files? 6 A. That's correct. 7 Q. Let's go to the paragraph, "Concise 8 description of the problem." 9 You discussed this document with 10 Mr. Veis, but I'd like to focus your attention to 11 a different part which is the second sentence of 12 the first paragraph on Page 2. 13 A. (Witness reviews the document.) Okay. 14 Q. Do you see that it -- that this 15 document, like all the others we've just been 16 reviewing, states very plainly that "a significant 17 portion of United's income is obtained through 18 non-operating income sources, primarily investment 19 securities." 20 Do you see that? 21 A. Yes. 22 Q. So, again, there's no doubt in your 17449 1 mind that that fact was well-known to the -- not 2 only the examination staff, you and Mr. Cooper, 3 but also to the supervisory staff at the Federal 4 Home Loan Bank of Dallas, correct? 5 A. Yes. 6 Q. Let me show you one final document on 7 this subject. It's a document that we talked 8 about together during your deposition last year, 9 but Mr. Veis has not put that document in evidence 10 in this hearing. It's a document that we've 11 marked as A12143. 12 Ms. Carlton, can you identify this as a 13 document that you have -- that you saw during the 14 course of your work as the examiner for United 15 Savings Association of Texas. 16 MR. VEIS: Excuse me, Your Honor. I 17 don't have a copy. 18 A. It is a document that was a part of the 19 work papers. That was a part of the, I guess, '87 20 work papers. 21 Q. (BY MS. CLARK) This would be part of 22 the work papers of the examination as of 17450 1 November '87; is that correct? 2 A. Yes, yes. 3 Q. And was the document created in the 4 first quarter of 1988? 5 A. It says February of '88, yes. 6 Q. Can you identify your handwriting 7 anywhere on this document? 8 A. The February '88 date is my writing. 9 The special note at the bottom on Page 2 is my 10 writing. The other information is not my writing. 11 MS. CLARK: Your Honor, I offer Exhibit 12 A12143. 13 MR. VEIS: No objection. 14 THE COURT: Received. 15 Q. (BY MS. CLARK) Now, if you would, 16 just briefly review the two documents -- that is, 17 the handwritten notes and the typed document. 18 Does it appear to you that someone has 19 typed up some handwritten notes of a meeting that 20 took place between certain individuals from the 21 General Accounting Office and you and your 22 supervisor, Joe Cooper, and two of the individuals 17451 1 from United's management? 2 A. You do have attached to this some 3 information on a meeting. 4 Q. And if you could compare the text of 5 the two documents, does it appear that someone has 6 typed up these handwritten notes and put them in 7 the form of a memo? 8 A. (Witness reviews the document.) No. I 9 think what you have is two different individuals 10 taking notes. 11 Q. And would you believe that you were one 12 of the individuals taking notes? 13 A. Yes. 14 Q. Okay. And that would be the typed 15 version? 16 A. Right. 17 Q. The handwritten version is not your 18 handwriting? 19 A. Correct. 20 Q. Is there any of your handwriting on 21 there? For example, on the first page of the 22 handwritten notes, is that your handwriting where 17452 1 it says "re: junk bond"? 2 A. Yes. "Re: junk bond" is my writing. 3 Q. All right. I would like you to tell us 4 what you remember about this meeting, Ms. Carlton. 5 A. I can't read -- it's barely legible. 6 All I can say is I do recall having the meeting. 7 And if I could read this, I could tell you what 8 the meeting was all about. 9 Q. Okay. I have no better copy to show 10 you right now, although I will represent to you 11 that the typed version is pretty much word for 12 word the same as the handwritten version. And, 13 therefore, if you would turn to the handwritten 14 (sic) version to see whether that refreshes your 15 recollection about the meeting, I think that would 16 be about as good as we can get. 17 A. (Witness reviews the document.) What 18 you have is a -- it's a -- this appears to try to 19 describe a description of the way GAO was 20 questioning possibly insider trading and how it 21 works. 22 Q. Okay. Are you referring to the special 17453 1 note that you wrote yourself on the handwritten 2 version? 3 A. No. I'm trying to unravel this bottom 4 note where it says "GAO: (Wants to look at) want 5 default statistics." And you have "liquidity" and 6 "hostile takeover versus friendly takeover, 7 (Possible insider trading.)" 8 Q. Uh-huh. Okay. Now, is that your 9 handwriting at the top where it says "Why 10 high-yield"? 11 A. No. 12 Q. So, that's the -- somebody else's -- 13 the person who took these notes? 14 A. Right. 15 Q. And there's -- corresponding on the 16 typewritten version that you prepared, it also 17 says "why high-yield" at the very bottom. 18 Do you see that? 19 A. Yes. 20 Q. And then it says, "In about four years 21 ago" on both the typed version and the handwritten 22 version? 17454 1 A. Right. 2 Q. Then it says "Evaluation (outside 3 consultants) identified high-yield bond market as 4 fairly liquid." 5 Do you see that? 6 A. Yes. 7 Q. And does that appear to you to be notes 8 of -- comments that were being made during the 9 meeting? 10 A. Yes. 11 Q. And it goes on to say "High-yield bond 12 market as fairly liquid. Easy management. Better 13 than some real estate lending can attract (and 14 keep) long-term deposits (funding source.)" 15 Do you take that to be comments made 16 during the meeting? 17 A. It's barely legible. I can't read it 18 to where you -- 19 Q. I'm doing the easy one. I'm doing the 20 handwritten version. 21 MR. VEIS: Your Honor, if I may, there 22 apparently were individuals from at least three 17455 1 different entities here. It's very unclear as to 2 whose comments these are. If Ms. Clark is going 3 to ask about comments from someone, I think that 4 it needs to be clear whose comments they are, if 5 it's possible to even establish that. 6 THE COURT: Well, I don't want her to 7 testify beyond her recollection. 8 Do you have any recollection of whose 9 comments these are? 10 THE WITNESS: No, I do not. 11 Q. (BY MS. CLARK) Let me ask you, if you 12 would, Ms. Carlton, to focus on the question of 13 "why high-yield." 14 Do you recall that USAT justified its 15 high-yield portfolio when questions were made -- 16 were directed about that portfolio by the 17 supervisory staff and even by you? 18 Do you recall that USAT attempted to 19 convince the regulators that the high-yield 20 investments were a proper business line for USAT 21 to be pursuing? 22 A. I was aware of that. 17456 1 Q. And do you recall that they -- some of 2 the reasons that they would give would be that the 3 high-yield bond market was fairly liquid, that it 4 was easy to manage? 5 Do you recall that? 6 A. I don't recall specifically as to what 7 they stated why. 8 Q. Do you recall that they argued that it 9 was better than real estate lending? 10 A. I do recall that argument. 11 Q. And do you recall that they said that 12 they could attract and keep long-term deposits as 13 a funding source in connection with the high-yield 14 bond investments that they were making? 15 A. I don't recall that statement. 16 Q. Now, do you recall that -- do you 17 recall the meeting with the GAO at all? 18 A. I recall we had the meeting, but -- 19 Q. Do you recall that it was discussed 20 during the meeting with the GAO that high-yield 21 bond had generated huge profits in 1984, 1985, and 22 1986, and it was an attempt to bolster capital? 17457 1 Do you recall that statement being made 2 by anybody at the meeting that you had with the 3 GAO and with Mike Crow and Eugene Stodart as 4 reflected in your memo? 5 A. No. 6 Q. If your memo reflects that such 7 statements were made, would you have any reason to 8 question the accuracy of your memo? 9 A. No. 10 Q. Now, are those statements that you 11 would have made during the meeting, Ms. Carlton? 12 A. No. 13 Q. And to your knowledge, are they 14 statements that the GAO representatives would or 15 could have made during that meeting? 16 A. Anyone could have made it as a part of 17 that meeting. 18 Q. So, it is your belief that the GAO 19 representatives who came from Washington to meet 20 with people in the 9th district to discuss junk 21 bonds would have been arguing or stating, as 22 reflected in this memo, that junk bonds were 17458 1 better than some real estate lending, et cetera, 2 as reflected on this -- on this memo? 3 A. I don't know that, quote, everyone 4 knows that the junk bond yield is higher than 5 mortgage lending yield for that period of time. 6 Q. Okay. And would it be your conclusion 7 that the source of the note here, "Huge profits 8 '84, '85, and '86, attempt to bolster capital," 9 would have come from statements by the GAO 10 representatives who had come down from Washington 11 to Texas to meet with you and the United 12 representatives? 13 A. I could not say who those statements 14 came from. 15 Q. So, you would not conclude, based on 16 these notes, that these statements could only 17 reasonably have been made by the representatives 18 of United and not by either the examination staff 19 or the GAO staff who were in attendance at this 20 meeting? You would not be willing to reach that 21 conclusion? 22 A. I could not say who made those 17459 1 statements. 2 Q. Thank you, Ms. Carlton. 3 THE COURT: We'll adjourn until 4 9:00 o'clock tomorrow. 5 6 (Whereupon at 4:44 p.m. 7 the proceedings were recessed.) 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 17460 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Marcy Clark, the undersigned Certified 5 Shorthand Reporter in and for the State of Texas, 6 certify that the facts stated in the foregoing 7 pages are true and correct to the best of my ability. 8 I further certify that I am neither 9 attorney nor counsel for, related to nor employed 10 by, any of the parties to the action in which this 11 testimony was taken and, further, I am not a 12 relative or employee of any counsel employed by 13 the parties hereto, or financially interested in 14 the action. 15 SUBSCRIBED AND SWORN TO under my hand 16 and seal of office on this the 30th day of July, 17 1998. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-99 21 22 17461 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Shauna Foreman, the undersigned 5 Certified Shorthand Reporter in and for the 6 State of Texas, certify that the facts stated 7 in the foregoing pages are true and correct 8 to the best of my ability. 9 I further certify that I am neither 10 attorney nor counsel for, related to nor employed 11 by, any of the parties to the action in which this 12 testimony was taken and, further, I am not a 13 relative or employee of any counsel employed by 14 the parties hereto, or financially interested in 15 the action. 16 SUBSCRIBED AND SWORN TO under my hand 17 and seal of office on this the 30th day of July, 18 1998. 19 _____________________________ SHAUNA FOREMAN, CSR 20 Certified Shorthand Reporter In and for the State of Texas 21 Certification No. 3786 Expiration Date: 12-31-98 22